Bernstein Downgrades SBI, Foresees Underperformance Against Private Peers

Bernstein says although public sector banks have exhibited robust performance compared to private lenders in the past three years, investors are advised to shift focus towards private sector banks

Bernstein, a leading brokerage firm, has downgraded shares of State Bank of India (SBI) to 'market-perform', citing limited upside potential. The firm also raised its target price for SBI stock to Rs 780 from Rs 710, acknowledging the bank's efforts to bolster its capital levels. The downgrade comes amidst concerns about the future trajectory of public sector banks compared to their private counterparts. Bernstein stated factors that could drive underperformance in public sector banks, particularly highlighting weaker deposit growth and lower liquidity buffers.

At 1.30 pm, shares of SBI were trading at Rs 774.35, down 1.75 per cent on the BSE. Over the past six months, SBI stock has surged by over 33 per cent, indicating significant market interest.

According to Bernstein, although public sector banks have exhibited robust performance compared to private lenders in the past three years, investors are advised to shift focus towards private sector banks. The brokerage firm foresees a less promising outlook for state-run banks, attributing it to challenges such as weaker deposit growth and inadequate liquidity buffers, leading to subdued earnings growth in contrast to private banks.

Bernstein also elaborated that the liquidity headroom for public banks is considerably lower than implied by the loan-to-deposit ratio. Despite higher investments fueled by increased deposits, these banks are unable to match the liquidity levels of their private counterparts.

The aggressive pricing strategy adopted by public banks in loans and deposits is viewed as a double-edged sword by Bernstein. While it drives loan growth, it also forces a tradeoff with margins, resulting in muted earnings growth. Even if public sector banks exhaust their remaining liquidity buffers to fuel growth, Bernstein argues that the higher loan growth will not necessarily translate into improved earnings.

In assessing market dynamics, Bernstein highlighted the disparity in market capitalisation to pre-provision operating profit (PPOP) ratio between public and private banks. Despite lower deposit growth rates, public banks command a significantly higher PPOP ratio compared to private banks, indicating a potential mismatch in valuation.

As the banking landscape continues to evolve, Bernstein's analysis suggests a cautious approach towards public sector banks, urging investors to reconsider their allocations in light of the changing market dynamics.