Goldman Sachs has taken a cautious stance on the State Bank of India (SBI), reducing its earnings estimates for FY25 and FY26 by 3% and 9%, respectively, reflecting growing concerns over the bank’s ability to sustain its profitability metrics. The brokerage emphasized that SBI is facing challenges in maintaining its return on assets (ROA), projecting a decline in RoA below 1% by FY26, a drop from the 1% recorded in FY24. This dip in profitability raises concerns about the bank's ability to continue generating strong returns in an increasingly competitive and complex financial environment.
One of the key factors contributing to the downgrade is the expected slowdown in net interest income, combined with a rise in loan loss provisions. Goldman Sachs pointed out that the increasing credit costs, particularly due to rising slippages in the MSME, agricultural, and unsecured loan portfolios, could significantly weigh on SBI’s earnings going forward. These higher provisions are reflective of the growing pressure on asset quality, especially in segments that are more vulnerable to economic fluctuations and the aftereffects of the pandemic.
In light of these risks, Goldman Sachs revised its target price for SBI stock, signaling a potential 9% downside from its current trading level of Rs 818.60. The downgrade marks a shift in sentiment for the banking giant, with investors now questioning the bank’s ability to navigate the headwinds posed by a challenging macroeconomic environment, especially with tightening liquidity and rising interest rates globally. Despite this negative outlook, SBI’s shares showed resilience, with a slight gain of 0.26% on Thursday, indicating that some investors remain confident in the bank’s long-term fundamentals.
Contrasting Goldman Sachs' bearish outlook, Axis Securities took a more optimistic view on SBI, identifying it as a strong player within India’s expanding economy. The brokerage highlighted SBI’s strategic focus on increasing deposits and shifting more assets from investments to loans, a move expected to bolster the bank’s Loan-to-Deposit Ratio (LDR) and maintain its net interest margin at around 3.2% over the medium term. Axis Securities also emphasized SBI’s robust Provision Coverage Ratio (PCR) and strong capitalization, which it believes will enable the bank to maintain a RoA in the range of 1% to 1.1% in the coming years, countering the more pessimistic projections made by Goldman Sachs.
Moreover, Axis Securities sees SBI’s strategic initiatives, such as its focus on digital banking and its leadership position in India’s banking sector, as key drivers for future growth. They also noted that SBI’s leadership in the retail lending segment, particularly in home loans and personal loans, places it in a favorable position to capitalize on the increasing demand for credit in India’s growing middle class and urban population.
InCred Equities also echoed a more bullish stance on SBI, maintaining it as one of its high-conviction stocks. The firm set a target price of Rs 1,100 for the shares, indicating confidence in the bank’s ability to weather short-term challenges and capitalize on long-term growth opportunities. InCred cited SBI’s dominant market position, robust asset quality, and ability to navigate cyclical downturns as reasons for its positive outlook.
This divergence in opinions among analysts underscores the complexity of the factors influencing SBI’s performance. While concerns over rising provisions and asset quality issues are valid, some experts believe that SBI’s strong market position, strategic initiatives, and focus on increasing operational efficiency could enable it to outperform in the long run. The bank’s large customer base, extensive branch network, and increasing focus on digital transformation are seen as competitive advantages that could help it maintain its leadership in the Indian banking sector, despite short-term volatility.
The mixed outlook on SBI reflects the broader uncertainty surrounding the Indian banking sector, which faces a delicate balance between growth prospects and the risks associated with rising inflation, global economic uncertainty, and tightening liquidity conditions. For investors, the key question remains whether SBI can successfully navigate these challenges and continue to deliver strong financial performance, or whether the risks highlighted by Goldman Sachs will lead to further downside in the stock’s valuation.
Investors will closely watch SBI’s upcoming quarterly results and management commentary for insights into how the bank plans to address these challenges and maintain its profitability in the face of increasing market pressures.
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