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Stata Bank of India new subsidiary: Stock upside left in the short term


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SBI office building
SBI has kicked off a first-of-its-kind initiative to reduce its escalating costs – Photo: Shutterstock

India’s largest lender State Bank of India has kicked off a first-of-its-kind initiative to reduce its escalating costs on Tuesday. Will that ensure the stock will sustain its momentum in the short term especially since it took off from the 50 DEMA (double exponential moving average) as against previous peaks?

A local media report said SBI began operations of a new subsidiary company, State Bank Operations Support Services Private Ltd, on Tuesday to optimise its revenues and 200,000 workforce. A State Bank of India spokesperson told Capital.com that banking regulator Reserve Bank of India had approved setting up a subsidiary for this purpose but did not confirm the launch date of operations as mentioned in local reports. The bank did not respond to a Capital.com email at the time of writing.

Ajit Mishra of Religare Securities believes the stock will touch 600 in the near term and that the stock has taken a breather after retesting its record high and will probably resume the trend in a week or two.

Hemali Dhame of Kotak Securities believed SBI stock will reach 700 in the near term. 

Bank's RoE to improve 

"We believe reduction of credit costs and strong topline growth will aid in improving RoE to ~15% in the medium term. The valuation too have opportunity to rerate. Having said that the report on opening a subsidiary to control costs will bear fruit in the medium term".

But according to Dhame, this is unlikely to be immediate.

"Hence seeing it with 50 DEMA for an entry point is not highly correlated for medium term advantages. Our view is banking sector’s business condition is improving and SBI is favourably placed across various parameters – grabbing immediate opportunities in gradual market share improvement, credit costs reduction and medium term," she said

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50 DEMA chart

A local media report said the pilot of the project started on Tuesday and that the bank plans to make it fully functional by end of the financial year. The subsidiary firm will provide support services to medium and small enterprises vertical, agri operations, among others. SBI expects to bring the cost-to-income ratio below 50%, the report said.

In the current quarter, the cost-to-income ratio of the bank jumped to 61.94%, compared with 51.89% in the same period last year.

“With the economy picking up, the bank sees growth in credit offtake. SBIN will also focus on increasing the CASA ratio, emphasising the current account book and maintaining its leadership position in savings and deposits. The better utilisation of its liabilities will lead to improvement in the key ratios,” a research report this month from KR Choksey summed up a conference call it held with the bank.

Chandan Taparia of Motilal Oswal Securities has a “buy” call on State Bank of India with a target price of 555 rupees.

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