UBS has downgraded the rating of State Bank of India (SBI) to ‘Sell’ from ‘Buy’ amid concerns over higher credit costs, narrowing margins and anticipated declines in Return on Asset (RoA) and Return on Equity (RoE) by the financial year 2025. The foreign brokerage has also slashed the target price of SBI to ₹530 from ₹740 earlier.
UBS expects retail loan delinquencies to rise, driving up credit costs in FY25. It also believes repricing of deposits will cap margins near current levels, thereby keeping the net interest income (NII) growth in line with loan growth of 11-12%.
SBI’s ROA and ROE are expected to moderate to 0.72% and 11.7% by FY25, driven by lower margins and rising credit costs.
Moreover, the largest lender in the country, SBI's unsecured loans have grown rapidly by 29% CAGR over FY19-23, and now comprise 10.8% of total loans, which could potentially limit growth or lead to dilution. SBI's CET-1 capital is at 10.8%, which leaves limited cushion against potentially tighter risk weights on unsecured loans, UBS said.
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“Considering relatively low CET1 against peers, we think potential regulatory tightening on unsecured loans is expected to limit loan growth or trigger dilution. The stock is trading at 1.0x FY25E P/BV, which does not appear expensive, however expected decline in profitability could result in downside,” UBS said.
SBI share price has outperformed the Bank Nifty Index by 33% since February 2020 and is trading at 1.0x FY25E P/BV.
“While the current valuation does not appear expensive, an inability to deliver consistently high ROA/ROE could result in the stock's de-rating. We expect ROA to decline 24 bp YoY to 0.72% by FY25 as we increase our credit cost estimates 10 bp to 0.85%,” UBS said.
It cuts FY24 and FY25 EPS estimates by 5% each, which are 8% and 22% lower than consensus.
At 11:25 am, SBI shares were trading 1.77% lower at ₹575.80 apiece on the BSE.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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