Sell SBI shares, says UBS as it slashes stock price target to Rs 530

Foreign brokerage UBS slashed its target on State Bank of India (SBI) to Rs 530 from Rs 740 earlier and cut its rating on the counter to 'Sell' from 'Buy', as it feels an inability to deliver consistently high return on equity (RoE) and return on asset (RoA) could result in the stock's de-rating.

UBS said SBI's earnings sensitivity to key metrics such as margins and credit cost remains high and, therefore, it expects the state-run bank's return on asset and RoE to moderate by FY25, driven by lower margins and rising credit costs.

Considering relatively low CET1 versus peers, UBS said potential regulatory tightening on unsecured loans would limit loan growth or trigger dilution.

UBS said the stock at 1 time FY25E price to book value does not appear expensive but a likely decline in profitability may result in downside.

"We downgrade the stock from Buy to Sell and lower our price target from Rs740 to Rs 530," it said. Its target incorporates 5 per cent earnings per share cuts for FY24 and FY25 and 20 per cent contraction in target P/BV multiple," it said.

UBS expects SBI's ROA to decline 24 basis points YoY to 0.72 percent by FY25 as it upped its credit cost estimates by 10 basis points to 0.85 per cent against 65 bps in FY24).

UBS said SBI's unsecured loans have grown rapidly (29 per cent CAGR over FY19-23), and now comprise 10.8 per cent of total loans.

Its study indicates risk of increasing retail delinquencies, especially unsecured. SBI has guided for a low-risk personal loans book, while credit score data suggests outstanding borrowers are of mixed quality.

"SOE banks' early delinquencies have been higher and therefore we assume an increase in credit costs for SBI over FY24-25. We thus expect credit costs to inch up to 85 bps in FY25. SBI's CET-1 capital is at 10.8 per ecnt, which leaves limited cushion against potentially tighter risk weights on unsecured loans, as per our sensitivity," UBS said.

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