State Bank of India gets a downgrade from Citi on fears of earnings decline

Brokerage firm Citi has downgraded its rating on India's largest lender State Bank of India Ltd. (SBI) to "sell" from its earlier rating of "buy". It has also cut its price target on the stock to ₹600 from ₹700.

The downgrade comes ahead of the lender reporting its December quarter earnings, the date for which is yet to be announced.

Citi has also opened a 90-day "negative catalyst watch" on SBI in addition to the downgrade.

The brokerage is expecting SBI's December quarter earnings to decline 13% year-on-year and 14% compared to the September quarter due to higher operating expenses. Opex is likely to rise due to higher wage revision and retirement benefit provisions.

State Bank of India's credit growth is likely to continue remaining below the industry average and Citi is projecting the Net Interest Income (NII) growth to moderate to mid-single digits going forward.

During the September quarter, SBI's Net Interest Income growth halved to 12.3% from 24.7% in the June quarter and moderated from the 12.8% growth shown during the September quarter of the financial year 2022.

Additionally, a capital raising initiative from SBI is imminent in the near term given the Domestic Systematically Important Banks (D-SIB) capital surcharge and capital consumption from higher risk weights on unsecured credit and NBFC lending.

The Reserve Bank of India released a list of Domestic Systematically Important Banks, wherein lenders like SBI and HDFC Bank are required to maintain higher capital from the financial year 2025. According to the RBI, the State Bank of India's additional CET-1 requirement as a percentage of risk-weighted assets was raised to 0.8% from 0.6% earlier.

On a base case scenario, Citi has a price target of ₹600 on SBI projecting a 14% loan growth in the financial year 2024 and 13% in the financial year 2025. For the base case, the banking business is valued at 0.9 times price-to-book.

Citi has a price target of ₹795 on SBI for its bull case scenario, where it assumes a 10 percentage points higher than base case loan growth for financial years 2024 and 2025. The bull case scenario also values the banking business at 1 times the price-to-book value along with a 25% higher value of subsidiaries.

On the other hand, SBI shares may fall to as low as ₹425 for Citi's bear case scenario. Citi also expects credit costs to be 50 basis points higher than the base case for the financial year 2024 and 2025.

Shares of State Bank of India have gained 7.2% over the last 12 months.