Shares of State Bank of India (SBI) hit their 52-week low level on Monday amid the weakness in the stock market. The largest state-run lender has seen a downgrade from InCred Equities which has cautioned investors to brace up for lower return ratios, denting the prospects for the lender.
InCred believes that SBI had delivered return on equities (RoE) of 16-17 per cent for the last few years, but they are unsustainable now and may moderate to 13-14 per cent as the credit cost shall normalize and core earnings will be impacted by the rate cut cycle. It also saw return on assets (RoA) to drop to 0.8 per cent for FY26-27E from 1 per cent.
Shares of State Bank of India dropped nearly 1.5 per cent on Monday to Rs 710.90, hitting its 52-week lows. The total market capitalization of the lender stood below Rs 6.35 lakh crore mark. The stock had settled at Rs 716.05 on Monday. The stock is down 22 per cent from its 52-week high at Rs 912.10, hit in June 2024.
Non-core income contributed 20 bps to RoA during 9MFY25, which includes 13 bps of treasury gains and 10 bps of recovery from written-off accounts. Strong treasury gains so far in FY25 have been led by a change in investment guidelines as well as lower G-sec yields, it said. Recovery from the write-off pool was healthy for SOE banks during 9MFY25 led by a few lumpy recoveries."
InCred expects core profitability to move lower as margin moderates and opex growth normalizes to 11 per cent YoY over FY26F-27F. FY26F margin to moderate by 15 bps and improve by 10 bps during FY27F as the deposit base reprices on a full-year basis. "We expect core PPoP CAGR over FY25F-27F at 11 per cent for loan growth of 15 per cent," it said.
SBI’s valuation doesn’t appear expensive but lacks rerating potential as profitability is set to moderate. Book value compounding over FY25F-27F is likely to be relatively better at large private peers, InCred added, downgrading SBI. "Our lower target price of Rs 795 (Rs1,100 earlier), is based on a sustainable RoE of 13 per cent and implies a 10 per cent upside," it added.
SBI reported an 84 per cent jump YoY in standalone net profit to Rs 16,891 crore in the December 2024 quarter. The PSU lender's total income rose 8.69 per cent Yoy to Rs 1,28,467 crore in the given quarter. SBI's Gross NPAs dropped 2.07 per cent for the quarter, while net NPAs improved to 0.53 per cent in the reported period.
However, other brokerage firms including HDFC Securities, KR Choksey Finserv and Choice Broking have a 'buy' rating on SBI. They have given the stock target prices of Rs 1,050, Rs 915 and Rs 1,102, respectively, suggesting up to 55 per cent upside in the lender.