Goldman Sachs has suggested a 'Sell' rating on State Bank of India (SBI) with a revised target price of Rs 742, which is 12 per cent lower than its previous price target of Rs 841, citing multiple headwinds. The foreign brokerage had 'Neutral' rating on the stock earlier.
Goldman Sachs believes the profitability at the PSU lender has peaked, the growth is under pressure and that a stock valuation de-rating is ahead. The best of the credit cost period is behind for SBI while the asset quality headwinds are building up, it said.
"We believe that the debate has shifted to the narrowing spread between ROE and COE given valuations have re-rated to 1.4 times 12-month forward PB. As a result, we cut our FY25-27 EPS by 3-9 per cent and our target multiple to 1 time from 1.2 times previously. Consequently, we downgrade State Bank of India to Sell from Neutral, with a revised price target of Rs 742, implying a downside of 9 per cent," Goldman Sachs said.
Goldman Sachs recently highlighted continued pressure on margins for the banking system emanating from challenges to deposit growth in its sector downgrade report.
Since then, there has been a continued hike in deposit rates as well as moderating margins for the sector.
"In particular, SOE banks have been witnessing moderating lending spreads as per data from RBI and the same was reflected in 1QFY25 NIM compression for SBI. We see this sustaining on the back of tepid deposit growth for SBI, peaking Loan-Deposit ratio, and slowing growth in higher-yielding unsecured loans; we expect NIMs to moderate 10bps over FY24-27E," Goldman Sachs said.
Given the gap in loan growth (16 per cent YoY in Q1) and deposit growth (8 per cent YoY in Q1) and the bank continuing to lose market share in deposits over the last four quarters, Goldman Sachs expects the lending growth to moderate. It has reduced its growth assumptions for SBI by 100-400 bps over FY25-27.
Goldman Sachs said risk-reward profile for SBI is turning unfavourable on growing headwinds to sustainability of return on asset (RoA). It expects RoA to moderate to sub-1 per cent level in FY26 from 1 per cent in FY24. Goldman Sachs sees lower loan growth ahead given the widening gap with respect to deposit growth.
It sees increase in credit cost due to rising slippages in MSME, agri and unsecured portfolios. SBI shares settled at Rs 818.60 on Thursday, up 0.26 per cent. The target price by Goldman Sachs suggests a 9 per cent potential downside from the prevailing level.
Nonetheless, SBI was among Axis Securities' top September picks.
Amongst PSU banks, SBI is the best play on the growth trajectory of India’s economic growth supported by its comfortable footing on the C-D Ratio, healthy PCR, adequate capitalisation and improved asset quality outlook, the brokerage said.
"SBI is focusing on increasing deposits by giving priority to CoD and CoF rather than overall growth. It is also moving assets from investments to loans, which should help improve the Loan-to-Deposit Ratio (LDR) and maintain its margins at 3.2 per cent in the medium term. Despite challenges with non-interest income, keeping operating expenses low should lead to healthy PPOP growth," it said.
This brokerage does not expect any challenges to the bank’s ability to protect RoA at 1-1.1 per cent over FY25-27E.
SBI stays InCred Equities' high-conviction stock ideas, the brokerage said on August 28. It suggested a target price of Rs 1,100 on SBI.