UBS Downgrades Top PSU Bank Stock, Assigns Sell Call

Brokerage firm UBS, on October 13, downgraded State Bank of India's (SBI's) rating from 'Buy' to 'Sell' rating and also sharply trimmed its 12-month target price to Rs 530 per share from Rs 740 per share. This is the first time the lender has received a 'sell' call.

The UBS brokerage report attributed such change in stance to anticipated declines in Return on Asset (RoA) and Return on Equity (RoE) by the financial year 2025. The bank's narrowing margin and increasing credit costs along with a challenging economic environment are driving these expected declines. UBS Analysts anticipate that the banking giant 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.

The regulatory tightening on unsecured loans has grown at a compound annual growth rate (CAGR) of 29% and could potentially restrict growth or lead to dilution. This is particularly concerning given SBI's low Common Equity Tier 1 (CET1) ratio.

The revision in the 12-month target price has factored in a 5% cut in Earnings Per Share (EPS) for FY24 and FY25, a 20% contraction in target price-to-book value (P/BV) multiple, and a 10 basis point increase in credit cost estimates.

Following the report, the majority of bank stocks staged a decline dragging Nifty Bank lower by 0.5% and Nifty PSU Bank by more than 1%. Apart from the Bank of Maharashtra, all constituents of the Nifty PSU Bank index traded lower with Bank of Baroda sliding more than 2%. SBI was seen trading with cuts of nearly 2% as the company continued with the declining trend for the third straight session.