Bullish indicating open at $55-$60, IPO prices at $37
On Thursday, Goldman Sachs revised its stance on shares of State Bank of India (SBIN:IN), downgrading the stock from Neutral to Sell. The firm also reduced the price target to INR742.00 from the previous INR841.00. The adjustment reflects concerns over the bank's future performance, including the sustainability of its return on assets (ROA) and loan growth, as well as rising credit costs.
According to the investment firm, State Bank of India is facing multiple challenges that may impact its profitability. There is an expectation that ROAs will decline from the peak levels of 1% in FY24 to below 1% in FY26E. Moreover, the growth in loans is anticipated to slow down due to a widening gap between deposit growth and loan growth.
The firm also foresees an increase in credit costs due to rising slippages in the micro, small and medium-sized enterprises (MSME), agriculture, and unsecured loan portfolios. These factors contribute to the bank's risk-reward profile becoming less favorable.
The reassessment by Goldman Sachs includes a reduction in the forecasted earnings per share (EPS) for FY25-27 by 3-9%. Furthermore, the target multiple based on a 12-month forward price-to-book (P/B) ratio has been adjusted to 1.0x from the previous 1.2x.
This revision in the bank's valuation metrics is due to a shift in the debate towards the narrowing spread between the return on equity (ROE) and the cost of equity (COE), especially as the bank's valuations have re-rated to 1.4x 12m fwd PB.
The new price target of INR742 implies a downside of 9%, which contrasts with the 1% and 21% upside for the coverage and Buy-rated names, respectively, that Goldman Sachs tracks. This change in rating and price target indicates a more cautious view of State Bank of India's stock by the investment firm.
In other recent news, State Bank of India has maintained a positive financial outlook for FY24, as reported by an analyst from Equirus. The bank has marked its sixth consecutive year of Return on Assets (RoA) expansion, reaching 1.04%, despite one-time employee expenses. The cost-to-income ratio stands at 59%, a slight increase from the previous year's 54%.
The bank has continued to keep its provisions low, averaging around 8 basis points compared to 31 basis points year-over-year. Recent developments include strategic initiatives across various loan verticals. In the retail sector, the bank has forged strategic partnerships with builders and automotive manufacturers and increased loan limits for pre-approved personal loans.
In the SME segment, State Bank of India has introduced a Business Rule Engine to expedite the processing of MSME loans. For the agricultural sector, efforts are in place to update the existing loan processing technology to speed up processing times.
Notably, the bank has made significant advancements in its IT infrastructure, developing the Outsourcing Lifecycle Management System (OLMS) and employing enterprise integration services to enhance its operations and service delivery.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.