SBI Downgraded A Notch By Bernstein After Nifty PSU Bank Jumps Almost 100% In A Year

Indian public sector banks may see slower earnings growth as compared to private lenders due to muted deposit growth despite aggressive pricing and lower liquidity buffers than private operators, according to Bernstein.

It is noteworthy that public sector banks have outshone their private counterparts in the last three years, driving a sharp re-rating for these stocks. "Thanks to their strong earnings growth, with PSBs now capturing around 45% of system profits," the brokerage firm said.

In addition, the brokerage has downgraded the country's largest public sector bank, State Bank of India, to 'market-perform' from 'outperform' earlier. "SBI’s new-found willingness to improve its capital levels has driven a sharp re-rating for the bank," Bernstein said. "However, we downgrade the stock to 'market-perform' given the limited upside from here."

However, the brokerage raised the lender's target price to Rs 780 apiece from Rs 710 apiece, led by a higher price-to-book multiple (1.5 times vs. 1.4 times earlier) that accounts for the marginally higher growth and return on equity in FY26.

Bernstein noted several factors that might lead to underperformance for public sector banks pointing out that the Nifty PSU Bank, which hit a new lifetime high on Thursday, has jumped 97.55% in the last twelve months and over 200% in the last three years.

"Aggressive pricing in loans and deposits is forcing a growth vs. margin tradeoff that will result in muted earnings growth, especially relative to private banks," it said. "So even if the PSBs squeeze out the remaining liquidity buffers to match growth, the higher loan growth will not translate into earnings growth."

Adding to this, the liquidity headroom remains a lot lower than what the loan-to-deposit ratio gap might suggest, given that higher investments for PSBs are a result of higher deposits (and lower equity) and cannot be reduced to be on par with private banks, the brokerage said. "Hence, PSBs can enjoy loan growth of around 16% for less than a year, if deposit growth remains weak at around 11%."

Moreover, with limited ‘excess liquidity’, deposits become the constraint for growth. "PSB deposit growth remains much weaker vs. PVBs," the brokerage said. "We see no reversal in this trend, and hence the growth differential between PVBs and PSBs will start to widen again."

"With the recent rally, the market cap to PPoP ratio (pre-provision operating profit) for PSBs is higher than 0.6 times that of PVBs, despite their deposit growth rates (the driver of long-term growth) remaining lower than 0.6 times that of PVBs," Bernstein said.

The State Bank of India ended 0.27% higher at Rs 786 apiece on Thursday, compared with the flattish close of benchmark Nifty 50. The stock has jumped 50.84% in the past 12 months.

Financial markets were close on Friday for Mahashivratri festivities.

Out of 51 analysts tracking the company, 42 maintain a 'buy' rating, six recommend 'hold' and three suggest 'sell,' according to Bloomberg data. The average 12-month consensus price target implies a downside of 3.1%.