Bullish indicating open at $55-$60, IPO prices at $37
On Friday, UBS analyst Vishal Goyal maintained a Sell rating on State Bank of India (NSE:SBI) (SBIN:IN) with a price target of INR 760.00. Goyal’s assessment followed the bank’s third-quarter profit after tax (PAT) announcement, which reported Rs 168.9 billion, surpassing UBS estimates. The higher-than-expected earnings were attributed to reduced credit costs, which were recorded at 23 basis points on an annualized basis, compared to 40 basis points in the second quarter.
Despite the earnings beat, the bank experienced a shortfall in net interest income (NII), which grew by 4.1% year-over-year, and a decline in treasury income. Net interest margins (NIMs) also fell by 13 basis points quarter-over-quarter due to an increase in the cost of deposits and slower growth in high-yield, unsecured retail segments. However, pre-provision operating profit (PPOP) saw a 16% year-over-year increase as operating expenses decreased by 6%.
Goyal pointed out that the gross non-performing asset (NPA) formation for the bank improved quarter-over-quarter, arriving at approximately 43 basis points, as per UBS estimates, compared to 53 and 94 basis points in the second and first quarters, respectively. Despite the current return on assets (RoA) exceeding 1%, UBS anticipates a deceleration, expecting continued pressure on NIMs and an upward trend in credit costs from the current exceptionally low levels.
The report highlighted concerns about the bank’s relatively lower core PPOP to assets, which is approximately 100-150 basis points lower than that of large private banks, as well as low counter-cyclical buffers and relatively high leverage. These factors, according to UBS, provide little cushion for the current RoA and return on equity (ROE). With the stock trading at 1.1 times the forecasted FY26 price-to-book value (P/BV), UBS believes there is no upside potential, and the risk-reward profile appears unfavorable.
In other recent news, Goldman Sachs has revised its price target for the State Bank of India, raising it to INR780 from INR742, while maintaining a sell rating. This adjustment reflects a comprehensive analysis of the bank’s financial prospects and current market conditions. The firm cites a shift in the risk-reward balance for the bank, with a predicted moderation of the bank’s return on assets (ROA) from 1% in fiscal year 2024 to below 1% by fiscal year 2026E being a primary concern.
The analyst also highlighted potential challenges in the bank’s growth trajectory, particularly in relation to loan growth. A widening gap between deposit growth and loan growth could indicate a potential slowdown in the bank’s ability to expand its loan portfolio. Additionally, an anticipated increase in credit costs, driven by rising slippages in the micro, small, and medium enterprises (MSME), agriculture, and unsecured loan portfolios, has been noted.
Recent developments also include potential farm loan waivers in Maharashtra, which could further aggravate the situation, leading to an acceleration in credit cost increases. With the bank’s valuations re-rated to 1.2 times the fiscal year 2025 projected book value, the focus is now on the narrowing spread between the bank’s return on equity (ROE) and the cost of equity (COE). This re-rating has played a role in maintaining the Sell rating despite the increased price target.
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