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Despite the benefits of heavy deposit flows and strong deposit growth in a slow growth environment, State Bank of India (SBI) has seen its stock price fall year-to-date due to its controversial exposure to Adani. However, according to Gurmeet Chadha, managing director and chief investment officer of Complete Circle Capital, there is still valuation “comfort” for SBI as it trades at about 1x book value at 525 Indian rupees ($6.4) a share. SBI revealed in February that its exposure to Adani Group is only 0.9% of its total loan book, which Fitch Ratings says is insufficient to pose a substantial risk to Indian banks’ credit profiles. However, it warned that state banks might feel pressure to refinance Adani entities if foreign banks reduce their exposure or investor appetite for the group’s debt weakens in global markets. However, analysts at Investec feel the 14% fall in SBI shares this year has been overdone, and the stock is trading well below its long-term average. In addition, Investec expects SBI to report a 30% yearly increase in net interest income. “While we have conservatively estimated the Bank to report Advances growth in line with the system, if the Bank continues to gain market share like it has in the last 3 quarters, we expect upgrades to our and consensus estimates,” analyst Karthik Velamakanni wrote in a note to clients on Apr. 6. Nearly all analysts – 43 out of 44 – covering the state-owned lender’s stock have a buy rating. The consensus price target of all analysts compiled by FactSet also points toward 717 rupees a share, which represents a 36% upside. SBIN-IN HDFCBANK-IN 1Y line SBI shares are also traded over the counter in the U.S. and the London and Frankfurt stock exchanges. Chadha notes that SBI has transformed its lending and retail book and made significant strides in digital initiatives while showing a good turnaround in asset quality metrics. HDFC over SBI If taking a more constructive long-term view on Indian banks as a whole, Chadha prefers HDFC Bank over SBI because it is merging with HDFC — which he describes as having “huge implications” — creating an almost $300 billion financial behemoth. According to Chadha, the merger will lead them to disrupt the “Micro, Small and Medium Enterprises” market where the bank has already forecast a 2% to 3% market share improvement. Chadha also said the combined HDFC entity would corner about one-fifth of India’s mortgage sector, bringing economies of scale and pricing power. HDFC Bank shares are up 4% this year and analysts’ price target points to a further 13% upside over the next 12 months. While acknowledging that SBI subsidiaries such as SBI Cards or Asset Management may have sum-of-the-parts upside potential, adding up to about 750 rupees per share according to some analyst expectations compared with the current price of 560 rupees per share, Chadha points out that this is true for many banks including HDFC which also has several subsidiaries including Asset Management and life insurance within their combined entity. Nevertheless, when asked who his winner was between both these stocks? His answer was clear: “I will go with HDFC if I take a three-year view”.
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