Shares of State Bank of India (SBI) were on the decline on Monday after the public lender received a downgrade from a global research firm.

What Happened: Bernstein downgraded shares of the State Bank of India (SBI) to “market-perform”, citing limited upside potential, while concurrently raising its target price for the stock to ₹780 from ₹710. However, the brokerage firm did acknowledge the bank’s efforts to enhance its capital levels as a positive development.

Bernstein emphasised a shift in investor preference from public sector banks to private sector peers, foreseeing a less promising trajectory for state-run banks. It highlighted weaker deposit growth and substantially lower liquidity buffers as key challenges facing public sector banks, which could hamper their earnings growth potential compared to private banks.

See Also: Tata Chemicals Shares Crash 8%, Analyst Sees Another 35% Drop Ahead

Bernstein cautioned that despite appearing to have a higher loan-to-deposit ratio, the liquidity headroom for public banks is significantly lower, primarily due to higher investments driven by increased deposits, which cannot be readily reduced to match levels seen in private banks.

The broking firm pointed out that aggressive pricing strategies adopted by public banks in loans and deposits are likely to result in a trade-off between growth and margins, leading to subdued earnings growth. Even if public sector banks exhaust their remaining liquidity buffers to sustain growth, Bernstein believes that higher loan growth may not necessarily translate into improved earnings growth.

Moreover, despite the recent rally in public bank stocks, Bernstein highlighted a significant disparity in the market cap to pre-provision operating profit (PPOP) ratio between public and private banks. Despite public banks exhibiting deposit growth rates lower than private counterparts, their market cap to PPOP ratio remains more than 0.6 times that of private banks.

Price Action: SBI’s share price was down 1.81% at ₹773.80 in afternoon trade on Monday.

Read Next: Upcoming IPOs In March: 8 IPOs Slated To Open This Week