UBS Downgrades SBI Rating and Slashes Target Amid Credit Cost Concerns
UBS Downgrades State Bank of India’s Rating to ‘Sell’ and Reduces Target Price
UBS has recently downgraded the rating of State Bank of India (SBI) from its previous status and lowered its target price. This decision comes as a result of anticipated declines in the bank’s Return on Asset (RoA) and Return on Equity (RoE) by the financial year 2025. UBS is concerned about SBI’s narrowing margins and increasing credit costs, which are expected to drive these declines.
Regulatory Tightening on Unsecured Loans Raises Concerns
SBI’s total loans include a significant portion of unsecured loans, which account for 10.8% and have experienced a compound annual growth rate (CAGR) of 29%. However, the recent regulatory tightening on unsecured loans could potentially restrict SBI’s growth or lead to dilution. This is particularly worrisome given SBI’s low Common Equity Tier 1 (CET1) ratio of 10.8%.
UBS’ Revised Target and Predictions for SBI
UBS’ revised target price takes into account various factors, including a 5% reduction in Earnings Per Share (EPS) for FY24 and FY25, a 20% contraction in the target price-to-book value (P/BV) multiple, and a 10 basis point increase in credit cost estimates. Additionally, UBS predicts a decline of 24 basis points in SBI’s RoA and cautions about potential increases in retail delinquencies due to the mixed quality of outstanding borrowers.
SBI’s Weak Gross Profit Margins and Escalating Credit Costs
SBI, a prominent player in the banking industry, is currently struggling with weak gross profit margins. UBS warns that SBI could face escalating credit costs, projected to reach 85 basis points by FY25. The bank’s ability to effectively manage these costs while maintaining profitability will be crucial in the coming years.
This article provides an overview of UBS’ downgrade of SBI’s rating and the reasons behind it. It highlights the concerns regarding SBI’s anticipated declines in RoA and RoE, as well as the impact of regulatory tightening on unsecured loans. UBS’ revised target and predictions for SBI’s future performance are also discussed, along with the bank’s weak gross profit margins and the potential risks posed by escalating credit costs. It is important for investors to consider these factors when evaluating their investment decisions related to SBI.
