Goldman Sachs downgrades SBI to 'Sell', slashes target price; share slips

The fall in SBI share price came the New York-based brokerage Goldman Sachs downgraded SBI to 'Sell' from 'Neutral'.

Goldman Sachs on SBI: Public sector lender State Bank of India (SBI) shares slipped in trade on Friday, September 6, 2024. The SBI scrip dropped as much as 4.10 per cent to an intraday low of Rs 785 on the Bombay Stock Exchange (BSE).

The SBI stock was also the top loser on 30-share Sensex.

The fall in SBI share price came after the New York-based brokerage Goldman Sachs downgraded SBI to 'Sell' from 'Neutral.' Goldman Sachs also reduced its target price for SBI to Rs 742, down from Rs 841. This new target suggests a potential downside of 9.35 per cent from Thursday’s closing price of Rs 818.60.

 

"We downgrade State Bank of India to 'Sell' from 'Neutral', with a revised price target of Rs 742 (Rs 841 prior), implying a downside of 9 per cent (versus 1 per cent / 21 per cent upside for our coverage /Buy-rated names)," Rahul Jain, Hardik Shah and Wuzmal Handu of Goldman Sachs said in a note.

Triggers behind the downgrade

Goldman Sachs has identified several challenges contributing to a downgrade of SBI’s outlook, highlighting a peak in return on assets (RoA) as a critical factor. The analysts also foresee a likely de-rating in valuation for the bank.

According to Goldman Sachs, SBI's risk-reward profile is becoming increasingly unfavourable due to growing obstacles impacting the sustainability of its RoA. 

They project that the RoA, which is expected to exceed 1 per cent in fiscal year 2024, will decline to below 1 per cent by fiscal year 2026.

Additionally, analysts at Goldman Sachs anticipate a slowdown in loan growth due to a widening gap between deposit and loan growth. They also highlighted that the bank has been losing market share in deposits over the past four quarters, which is expected to continue. 

Thus, analysts at Goldman Sachs have revised their growth projections downward by 100-400 basis points for FY25E-FY27E.

They also predict rising credit costs due to increased slippages in Micro, Small & Medium Enterprises (MSME), agriculture, and unsecured loan portfolios. 

"We believe that the debate has shifted to the narrowing spread between RoE and cost of equity capital (CoE) given valuations have re-rated to 1.4x 12 month forward price-to-book (P/B). As a result, we cut our FY25-27 earnings per share (EPS) by 3-9 per cent and our target multiple (12 month forward P/B) to 1.0x from 1.2x previously," Goldman Sachs analysts said.

Q1FY25 performance

State Bank of India (SBI) announced its June quarter of financial year 2025 (Q1FY25) results on August 3, 2024. The lender reported nearly flat standalone net profit for Q1FY25, totaling Rs 17,035 crore, compared to Rs 16,884 crore in the same quarter of the previous financial year (Q1FY24). 

The bank's total income rose to Rs 1,22,688 crore for the first quarter, up from Rs 1,08,039 crore a year earlier. Interest income also increased to Rs 1,11,526 crore, compared to Rs 95,975 crore in the previous year.

SBI's gross non-performing assets (NPAs) improved, decreasing to 2.21 per cent of total advances from 2.76 per cent at the end of June last year. Net NPAs also saw a reduction, falling to 0.57 per cent in June 2024 from 0.71 per cent a year ago.

At 2:31 PM, shares of SBI were trading 4.04 per cent lower at Rs 785.40 per share. In comparison, BSE Sensex was trading 1.24 per cent lower at 81,178.58 levels.