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UBS has downgraded the rating of State Bank of India (SBI) to ‘Sell’ from a previous rating and reduced its target price to Rs 530 from Rs 740, as announced on Friday. This change in stance is attributed to anticipated declines in Return on Asset (RoA) and Return on Equity (RoE) by the financial year 2025. The bank’s narrowing margins and increasing credit costs are driving these expected declines.
The regulatory tightening on unsecured loans, which make up 10.8% of SBI’s total loans and have grown at a compound annual growth rate (CAGR) of 29%, could potentially restrict growth or lead to dilution. This is particularly concerning given SBI’s low Common Equity Tier 1 (CET1) ratio of 10.8%.
UBS’ revised target also takes into account a 5% cut in Earnings Per Share (EPS) for FY24 and FY25, a 20% contraction in the target price-to-book value (P/BV) multiple, and a 10 basis point increase in credit cost estimates. The firm predicts a drop of 24 basis points in SBI’s RoA and cautions about potential increases in retail delinquencies due to the varied quality of outstanding borrowers.
SBI is a prominent player in the banks industry as noted in InvestingPro Tips, but it suffers from weak gross profit margins.
Furthermore, UBS warns that SBI could face escalating credit costs, which are projected to reach 85 basis points by FY25. The financial institution’s ability to manage these costs while maintaining profitability will be crucial in the coming years.
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