Moneycontrol Pro Panorama | Dancing elephants and awkward valuations

SBI reported its highest ever quarterly profit for January-March period of FY23 and a whopping Rs 50,000 crore bottomline for the whole year.

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A cynic knows the price of everything and the value of nothing, goes a line Oscar Wilde’s play Lady Windermere’s Fan. Wilde wouldn’t have known that the line could perhaps resonate with the beef India’s largest lender has with the stock market.

On Thursday, State Bank of India (SBI) reported its highest ever quarterly profit for January-March period of FY23 and a whopping Rs 50,000 crore bottomline for the whole year.  Its overall quarterly earnings performance was nothing short of a stunner. As my colleague Neha Dave notes in her piece here SBI’s net profit jumped 83 percent year-on-year, its net interest income surged 29 percent and loan growth was a strong 16 percent. Assets that earn no money or bad loans as they are called were the lowest in at least a decade.

True, SBI’s private sector peers such as HDFC Bank Ltd and ICICI Bank Ltd can give these numbers the required counter but here is where size matters. At Rs 55.16 lakh crore, SBI’s balance sheet is twice as big as HDFC Bank's and multiple times that of ICICI Bank. At Rs 32.69 lakh crore loan book, SBI dwarfs every other bank and a 16 percent growth on such a size only proves that elephants can dance (incidentally a remark made by an HDFC Bank executive in its earnings call earlier this month).

But SBI’s size is not news after it gobbled up its associates years ago. What is of interest is that the banking elephant is finally delivering on profitability and how. In FY19, SBI generated a net profit of Rs 862 crore on a balance sheet size of Rs 36.80 lakh crore. Clearly, the lender has come a long way and its boss Dinesh Khara has perhaps all the right to be miffed if the market is ignoring its dance.

In the post-earnings analyst meet, Khara gave clipped answers to questions regarding the bank’s capital. When asked whether SBI will need to raise capital, Khara drew attention to the bank’s profit and said, “we will generate profit and plough it back and need not raise money from market. We will create value for our existing shareholders.” He added that the performance is testament to the fact that SBI’s loan underwriting skills have been fortified and are of a higher standard now.

But stock markets are fickle (or perhaps cynical) and the share price of SBI fell post quarterly earnings release. What’s more, SBI has underperformed the broad market so far in 2023 despite the general euphoria around banking stocks. That brings us to the beef between SBI and the markets.

The stock still trades at a benign valuation compared with its private sector peers and it has hardly traded significantly above its one-year ahead book value. At the same time, peers have been bestowed higher valuations. SBI chairmen, past and present, have felt that the market has been unfair to the bank. While earlier analysts had pointed out the chequered past with risk management, tardiness in digital adoption leading to low profitability, these are no longer applicable.  With YONO positioned as a super app, the lender has scaled the digital peak although some challenges remain.

Perhaps it is time to look at SBI with a new lens and notice the elephant shaking a leg. Also, if SBI does well it is good news for the economy too. A quickening of the largest lender’s corporate book led by private sector demand means capex growth has finally arrived. Yet another factor that could help here is the declining term premium or the return that investors get for locking in money long term. The stock market has recognized the economy’s resilience and now it must acknowledge SBI’s heft.

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Aparna IyerMoneycontrol