InCred has downgraded State Bank of India (SBI) to ‘Hold’ from ‘Add’ and revised the target price to ₹795 from the earlier ₹1,100, citing concerns over moderating profitability and sustainability of non-core income. The brokerage expects Return on Assets (RoA) to moderate to 0.8% over FY26F-27F, down from approximately -1% in FY25F, primarily due to declining margins and normalizing credit costs.
Key Insights:
- Profitability Concerns: InCred anticipates a decline in RoA to 0.8% over the next two fiscal years as margins contract and credit costs return to normal levels.
- Non-Core Income Sustainability: A significant portion of SBI’s RoA is driven by non-core income, but InCred questions the sustainability of this income stream in the coming quarters.
- Recovery from Write-offs: The report also highlights that SBI’s recovery from the write-off pool is lower compared to its state-owned peers, impacting overall profitability.
- Valuation and Risk-Reward Dynamics: InCred states that the risk-reward appears more favorable at large private banks, suggesting a better investment opportunity in the private banking space over SBI.
Outlook and Recommendation:
InCred remains cautious about SBI’s profitability trajectory given the challenges in sustaining non-core income and the moderation in RoA. The brokerage’s target price of ₹795 reflects these concerns, and the downgrade to ‘Hold’ indicates a neutral stance on the stock in the near term.
With large private banks offering better risk-reward dynamics, investors are advised to exercise caution and consider alternative investments within the banking sector.
