State Bank of India (SBI) shares have corrected seven per cent so far in 2023, sharply underperforming a rally of almost 19 per cent in the Nifty PSU Bank index. Brokerage Motilal Oswal Financial Services Ltd (MOFSL) maintained a ‘buy’ rating on the country’s largest bank by assets with a target price of Rs 700 for its stock, suggesting an upside of 24 per cent from the previous close. 

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The positive views of Motilal Oswal analysts come even as the Reserve Bank of India (RBI) rattled the banking space last month by raising the risk weights assigned to banks and NBFCs by 25 percentage points to 125 per cen on retail loans. Risk weights are the capital that commercial banks need to set aside for the loans disbursed.  

SBI, however, implied that the sharp increase in the risk weights should not pose anysignificant challenge for it, and that it is well placed to absorb this impact.  

According to the brokerage, the overall impact is estimated to be 49 basis points, of which, 28 basis points is attributed to unsecured loans and 21 basis points to lending to NBFCs. Motilal Oswal Financial Services had earlier estimated the impact to be 44 basis points.  

What is the increase in risk-weight assets by the RBI? 

The RBI increased the risk weight associated with these assets in a bid to curb the extraordinary rise in consumer loan disbursal. What this risk weight means is that banks need to maintain capital to cover these risk-weighted assets, depending on the inherent risk of these loans.  

Consequently, while it becomes more expensive for financial institutions to lend in these segments, the borrower will also have to bear the brunt of higher interest rates.

Analysts at Motilal Oswal Financial Services wrote in a report dated November 30 said, "The bank’s CET-1 ratio, including 1H profits, stands at 11.03 per cent, and after this impact, it will still be fairly comfortable at 10.54 per cent while the underlying profitability remains strong and will enable sustained growth momentum."

A gradual ramp-up in digital lending via SBI’s mobile app, YONO, is also resulting in operational efficiencies and will lead to moderation in cost ratios for the bank, according to the brokerage.  

The bank has surpassed its previous RoA target of 1.0 per cent, and now aims to deliver 1.2 per cent RoA and around 20 per cent RoE on a sustainable basis, it said. 

In its earlier report, released early this month, Motilal Oswal maintained a ‘buy’ rating on SBI with a target of Rs 700, stating that higher wage provisioning gets offset by controlled credit costs. It estimated the bank’s FY25 RoA at 1.1 per cent and RoE at 18.3 per cent. 

Earlier, HDFC Securities maintained its ‘buy’ rating on SBI with a target of Rs 790, stating that the potent combination of traditional strengths and newly-added moats is reflecting in higher throughput, sustained efficiency gains (lean P&L), and high-quality new loan origination, translating into structurally lower creditcosts and better return ratios for the lender.