Brokerage firm UBS on Friday, October 13, downgraded State Bank of India's (SBI's) rating from "Buy" to "Sell". This is the first "Sell" rating for the lender. The same was accompanied by a significant target price cut from Rs 740 to Rs 530, indicating their bearish outlook on the bank's stock performance.

UBS also expressed growing concerns about the bank's future performance, citing various reasons behind their rating shift. In a report, UBS said that SBI's best financial metrics may already be in the rearview mirror. They predict that return ratios will likely peak in FY24 and expect a decline in FY25.

The report highlighted the anticipation of a rise in retail loan delinquencies, particularly in the unsecured loan segment, which could drive up credit costs for SBI in FY25. UBS further forecasted a significant increase in credit costs, with estimates suggesting a rise to 85 basis points (bps) in FY25, compared to 56 bps in FY23 and their previous estimate of 65 bps for FY24.

The UBS analysts anticipate that SBI's margins will be capped near current levels, mainly due to factors such as rising credit costs and a challenging economic environment. The expectations are that SBI's Return on Assets (ROA) and Return on Equity (ROE) will moderate to 0.72% and 11.7%, respectively, by FY25, reflecting a less favourable outlook.

"SBI's Common Equity Tier 1 (CET1) capital ratio stands at 10.8%, leaving limited room for manoeuvre in the event of regulatory tightening," UBS said.

Stock performance

Despite its previous robust performance, SBI is already trading 7% below its 52-week high. UBS noted that the stock had outperformed the broader banking index by approximately 33% since February 2020.

In response to these concerns, UBS has cut its earnings per share (EPS) estimates for SBI by 5% for FY24 and FY25, which now stand at 8% and 22% lower than the consensus forecasts.

(Edited by : Amrita)

First Published:Oct 13, 2023 9:18 AM IST