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Top-line remained moderate: State Bank of India (SBI) reported net interest income growth of 1.5% QoQ/12.3% YoY to Rs 39,500 Cr in Q2FY24 mainly due to increase in cost of deposits by 10bps QoQ/81bps YoY to 4.7%. Due to the increase in cost of deposits, interest expended increased by 8.4% QoQ/38.5% YoY to Rs 61,879 Cr putting downward pressure on net interest income.

Margins continue to remain under pressure: Net interest margin declined by 4bps QoQ/12bps YoY to 3.4% mainly due to increase in cost of deposits. The management expects cost of funds to remain elevated and NIMs may see a decline of 3-5bps going forward. International NIMs may continue to remain at current levels.

Decline in profit growth: PAT during the quarter increased by 8% YoY to Rs 14,330 Cr, however, it declined by 15.1% QoQ mainly due to increase in operating costs. Employee cost increased by 14% QoQ/47.1% YoY owing to the revision in wage provisions by the bank. The increase in wage provision is leading to incremental cash outflows by the bank. Due to this, cost to income ratio remained elevated for the bank at 61.4% increasing by 1102bps QoQ/933bps YoY.

Loan growth in line with the industry: Domestic advances increased by 13.2% YoY to Rs 28,240 Bn was mainly driven by retail/SME growth of 15.7%/22.8% YoY. Corporate growth remains sluggish at growth of 6.6% YoY. In retail loans auto/personal continue to growth with 20.2%/17.8% YoY. The bank is seeing traction in the SME and expects growth in the segment to sustain in estimates. Credit to deposits ratio improved by 32bps YoY to 72.7%. SBI’s market share in home loans and auto loans stood at 27.4% and 19.3%, respectively. The growth in advances is expected is to be in the range of 12-14% by FY24.

Term deposit led deposits growth: Domestic deposits grew by 11.8% YoY to Rs 45,033.4 Cr, it was led by term deposits growth of 17.4% YoY. The increase in term deposit was mainly attributable due to increase in cost of deposit and the bank’s strong franchise. CASA deposits remained subdued with a growth of 4.9% YoY. Consequently, CASA ratio stood at 41.9% declined by 100bps QoQ/275bps YoY.

Asset quality continue to improve: Asset quality of the bank continues to improve as GNPA/NNPA saw a decline across sectors. Slippage during the quarter declined by 24bps QoQ/16bps YoY to 0.7%. The bank restructuring book continues to remain low at 0.62% declining by 8bps QoQ/31bps YoY/. GNPA/NNPA declined by 97bps/16bps YoY to 2.6%/0.6%. The bank remains confident of its underwriting practices and sees no stress in any of its loan segment.

Valuation: We remain positive on SBI as the bank is seeing credit growth in line with the industry while deposit is seeing traction due to retail deposits. While the margin is expected to remain subdued, credit demand will continue to drive growth for the bank. The bank’s asset quality continues to improve and its underwriting practices remain strong. We estimate is NII/PPOP/PAT to growth at a CAGR of 17.8%/11.9%/13.5% over FY23-25E. We maintain Buy with the target price of Rs 677 valuing the standalone bank at 1.3x of its FY25E Adj. BV.

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