SBI share price hits 52-week low as InCred Equities downgrades to 'Hold'

InCred Equities on SBI: State-owned lender State Bank of India (SBI) shares dropped as much as 1.47 per cent to hit a fresh 52-week low of Rs 710.90 per share on Monday, February 24, 2025. 

 

The fall in the SBI share price came after domestic brokerage firm InCred Equities downgraded the stock to ‘Hold’ from ‘Add’, saying that the non-core income contributes materially to return on assets (RoA), and its sustainability is questionable. Moreover, the recovery from the write-off pool is lower as compared to the state-owned enterprises (SOE) peers.

 

The brokerage has also reduced the target price to Rs 795 from Rs 1,100 per share, which reflects an upside of 10.17 per cent from the previous close of Rs 721.55 on February 21, 2025. 

 

 

However, at 9:47 AM, SBI share price was trading 0.59 per cent lower at 717.30. In comparison, BSE Sensex was trading 0.75 per cent lower at 74,744 levels.

 

Here are the key factors contributing to the downgrade of SBI stock

 

Expect RoA to moderate

 

According to InCred Equities analysts, the average return on equity (RoE) of about 16-17 per cent that State Bank of India (SBI) has delivered in recent years is seen as unsustainable.They expect its RoE to moderate to 13-14 per cent during FY26F-27F, as credit costs normalise (to 50bp from 36bp in FY25F), and core earnings are impacted by the repo rate cut cycle. 

 

Additionally, analysts forecast RoA to decline to 0.8 per cent over FY26F-27F, down from about 1 per cent during FY25F. With leverage at 16x, this will contribute to a sharper drop in RoE. 

 

The CET-1 ratio of about 11 per cent at Q3FY25-end is lower compared to peers and includes mark-to-market (MTM) gains under the new investment guidelines.

 

Non-core income contributes materially to RoA – difficult to predict

 

The Non-core income, analysts highlighted, contributed approximately 20bp to RoA during 9MFY25, including 13bp from treasury gains and around 10bp from recoveries on written-off accounts. 

 

The strong treasury gains in FY25 were driven by changes in investment guidelines and lower G-sec yields (down about 40bp fiscal Y-T-D). Recovery from the written-off pool has been healthy for SOE banks during 9MFY25, with some large recoveries. 

 

However, forecasting future recoveries is challenging, and it is worth noting that SBI has the lowest written-off account pool at 4 per cent of gross loans, compared to 7-8 per cent for SOE peers.

 

Core earnings growth to be impacted by recent rate cuts

 

InCred Equities analysts anticipate core profitability to decline as margins moderate and operating expense growth normalises to 11 per cent YoY over FY26F-27F (compared to muted growth in FY25). 

 

They expect a margin moderation of nearly 10bp in FY26, bringing the margin down to 2.9 per cent (from the Q3FY25 margin of about 3 per cent). 

 

On a full-year basis, analysts project a 15bp moderation in FY26F margin compared to FY25F, with a 10bp improvement in FY27F as the deposit base reprices. Core pre provisioning operating profit compound annual growth rate (PPoP CAGR) is expected to be 11 per cent for loan growth of 15 per cent over FY25F-27F. 

 

On asset quality, the pace of recovery/upgrade has slowed to 0.3 per cent of trailing loans in 9MFY25, down from 0.6 per cent in 9MFY23. Hence, analysts estimate credit costs to be 50bp, which is in line with the bank's guidance for the cycle.

 

Risk-reward ratio more favourable for large private banks

 

While SBI’s valuation is not expensive at 0.9x FY27F book, the lack of a potential rerating as profitability moderates led analysts to downgrade the stock. 

 

Moreover, book value compounding over FY25F-27F is expected to be better at large private banks (13 per cent-16 per cent) compared to SBI (11 per cent). 

 

Upside risks, analysts said, include stronger-than-expected margin and lower credit costs for a prolonged period. Meanwhile, downside risks, they said, included, slower-than-expected volume growth, further repo rate cuts, and higher staff costs. 

 

InCred Equities analysts also said that their estimates are lower than consensus, as the market has yet to account for the repo rate cut in its projections.