Who’s the Lion Leading the Pack of PSU Banks in India?

It is believed that ‘Nothing goes wrong when you have your heydays ahead’. The demand across the domestic economy showing no respite since the successful roll-out of the COVID-19 vaccination program across the country. Similar is the run-up in the prices of public sector banks. As per recent data, India’s banking sector’s credit growth rate is at a record pace of 16.7% annually. This growth is being led by the State Bank of India, whose annual loan book has grown by 20.8% for the Q2 ending in September 2022.

Domestic demand has stood resilient to all kinds of recessionary concerns in the western world. Corporate earnings remaining consistently buoyant quarter after quarter have kept the market valuations on their toes. Among the sectors that have outperformed over the last year is the public sector banking space. Some banks have rallied more than 50-100% during the previous year, providing good prices to enter and exit at a profit.

In the Q2FY23 earnings, SBI reported a standalone net profit of Rs 13,264 crore, the highest ever in a quarter, with Net Interest Margins above 3.5%. The state lender’s loan book grew by more than 20% and deposits by around 10% annually. Most interesting was to see the net NPA ratio at 0.80%, below 1% for the first time in many years and the credit cost stood at a mere 0.28%.

We expect the overall banking sector’s credit growth to decrease with another rate hike due in December and the end of the festive 3rd quarter. However, hikes in interest rates don’t have much of an impact on the size of the EMIs for personal loans and credit cards, which are seen growing at pre-pandemic rates. On the other hand, RBI hiking interest rates will cool down the growth rates of corporate and mortgage loans, which have interest rates linked to MCLR rates, thereby slowing down the overall economic activity and taming down inflation. Hence, being the largest bank, SBI will benefit from economies of scale and improved asset quality helping increase their returns, e.g. annualised RoA of 1.04% in Q2FY23 to rise a few basis points further north, around ~1.25% before stabilising.

Here we consider:

• The large size of SBI’s business
• Portfolio growth of 20% 
• Room for an increase in the margin by a few more basis points

We are expecting the bank will yield a good return on assets witg double-digit growth in valuations in the longer term. We have SBI in the Teji Mandi smallcase portfolio, which we entered at Rs. 350 in February 2021, giving us 75% returns till date. SBI has rallied more than 15% over the last year despite the benchmark indices not crossing the all-time high seen a year ago.

Anmol Das – Head of Research, Teji Mandi

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