PSBs extend fall after Goldman Sachs downgrades SBI; Canara, UBI down 3%

The Nifty PSU Bank index, the top loser among sectoral indices, was down 1.1 per cent at 6,581.40, as compared to the 0.16 per cent rise in the Nifty 50 at 11:14 AM on Monday.

Shares of public sector banks (PSBs) are down for the second straight day, falling by up to 4 per cent on the National Stock Exchange (NSE) in Monday’s intra-day trade.

Shares of PSBs extended their Friday’s decline after Goldman Sachs downgraded sector giant State Bank of India (SBI) to 'Sell' from 'Neutral.' The brokerage firm also reduced the target price for the PSU bank to Rs 742, down from Rs 841.

Shares of SBI have slipped 1 per cent to Rs 773.60 on the NSE in intra-day trade today. The stock has pulled back by 5.4 per cent in the past two days.  

Besides, SBI, Punjab & Sind Bank, Union Bank of India, Bank of India, Uco Bank, Punjab National Bank, Canara Bank, Indian Overseas Bank, Bank of Baroda and Indian Bank were down between 2 to 4 per cent on the NSE in intra-day trade today.

These stocks have corrected by up to 32 per cent from their respective 52-week highs on the NSE, data from the exchanges show.

Meanwhile, the Nifty PSU Bank index was down 1.6 per cent in intra-day trade today, dipping 19 per cent from its 52-week high level of 8,053.30.

At 11:14 AM, the Nifty PSU Bank index, the top loser among sectoral indices, was down 1.1 per cent at 6,581.40, as compared to the 0.16 per cent rise in the Nifty 50.

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 brokerage firm also foresees a likely de-rating in the bank's valuation.

Rahul Jain, Hardik Shah and Wuzmal Handu of Goldman Sachs, believe risk-reward profile is turning unfavorable for SBI on growing headwinds to the sustainability of return-on-assets (ROA). They expect the company's ROA to moderate from peak levels of 1 per cent in FY24 to sub-1 per cent in FY26E.

Additionally, analysts at Goldman Sachs anticipate lower loan growth going forward given the widening gap between deposit growth and loan growth, apart from an increase in credit costs due to rising slippages in the MSME, agri and unsecured portfolios.

Analysts believe the debate for SBI has shifted to the narrowing spread between ROE and COE as valuations have re-rated to c1.4x 12 month forward book value per share (BVPS). Historically, whenever credit concerns have risen, the cost of equity has inched up.

In this cycle, if rural distress were to compound, coupled with potential farm loan waivers, the cost of equity would start inching up, according to analysts. However, they see limited scope for ROE to expand on compression in net interest margins (NIMs) and increase in credit costs, thereby putting multiples under pressure.

Meanwhile, according to analysts at Elara Capital, the valuation of mid-tier PSU and mid-tier private banks indicate valuation is rather rich, and re-rating later may be slow.

The brokerage firm believes, risk-reward is sharply tilted toward frontline peers. No significant asset quality challenges and better growth may ensure a sustained re-rating for PSU banks on earnings stability, Elara Capital said.

“We believe PSBs might not be able to drive the return profile further, and, at best, may sustain earnings; thus, there would be limited scope of rerating and it would be relatively slow. Based on relative ranking among PSB, SBI seems to fare better than peers,” the brokerage firm said in its annual analysis report for PSU banks.

Meanwhile, analysts at Emkay Global Financial Services expect credit growth to moderate in FY25 (12-13 per cent) due to expected slowdown in unsecured retail loans following Reserve Bank of India's (RBI) action and continued liquidity pressure.

This, coupled with the new Liquidity Coverage Ratio (LCR) norms and potential lending rate cut by the fag-end of the year, should add to the pressure on margins, more so for private sector banks (PVBs). 

“The rising and persistent stress in unsecured loans for PVBs and microfinance institutions (MFI) lenders adds to our concern. However, PSBs should still report relatively better earnings growth, benefiting from treasury gains; lower wage cost vs FY24, and contained provisions. Within PSBs, we prefer Indian Bank, followed by BOB and SBI,” the brokerage firm said in its BFSI sector report.

“Valuations remain close to long-term averages and banks remain one of the few pockets of value. Notwithstanding the valuation argument, we see growth (NII, PPOP) and asset quality to be critical for sector re-rating and thus maintain our circumspect stance. We continue to prefer larger banks and our key picks are ICICI Bank, Axis Bank, SBI,” analysts at JM Financial Institutional Securities said.