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Ruling the roost!

Stands tall among the best-performing banks globally

* State Bank of India (SBIN) has delivered a strong all-round performance for the past few years and has achieved new milestones in profitability (PAT surpassed INR600b in FY24). The bank has demonstrated considerable improvementsin underwriting standards, while the consistent strengthening of its balance sheet has brought NPAs to pristine levels.

* In terms of returns, SBIN has delivered a 34% CAGR over the past two years, with its market cap swelling to ~USD89b. Our assessment of large global banksshows that SBIN has delivered the best-in-class RoE and loan growth among large global banks.

* During FY22-24, SBIN has delivered a ~16% CAGR in loans, outperforming many large peers. Interestingly, the current size of SBIN’s balance sheet at INR62t is more than the GDP of almost 174 countries in the world. We reckon that this gap is only going to widen as SBIN delivers steady growth going ahead. SBIN has demonstrated high agility and superior execution even at this huge size and is well poised to maintain this momentum.

* A strong liability profile, an enviable CD ratio and robust tech capabilities position SBIN well to capitalize on growth opportunities as a stable policy environment and continued reforms continue to bolster overall economic activity.

* We estimate SBIN to deliver a 16% CAGR in earnings over FY24-26, backed by healthy loan growth, moderation in opex ratios and controlled credit cost (35-40bp), thus resulting in FY26E RoA/RoE of 1.1%/18.5%. SBIN remains one of our top ideas in the sector and we reiterate our BUY rating with a TP of INR1,015. Remarkable earnings turnaround from losses to profit of INR600b SBIN has delivered a

remarkable earnings turnaround, surpassing the PAT milestone of INR600b

in FY24, driven by improvements in asset quality, robust credit growth and steady margins. While earnings during the past three-year period of FY22-24 exceeded that of the prior 20 year (FY02-21), the bank's financial health and asset quality have also notably improved. We estimate the earnings outlook to remain robust and FY26E PAT to surpass INR800b, led by steady NII and controlled opex and provisions. The bank’s focus on maintaining a healthy mix of RAM segments, coupled with robust underwriting and strengthening digital capabilities, will enable it to sustain its leadership position within the sector.

SBIN’s balance sheet size surpasses GDP of 174 countries worldwide

The bank’s balance sheet has grown at a steady pace, reaching INR62t in FY24. Notably, SBIN's balance sheet is equivalent to 21% of India's GDP and surpasses the combined GDP of 174 countries. With India projected to rank among the top three global economies by FY27, SBIN is well poised to expand its lead and play a pivotal role in shaping India's economic landscape, supported by policy continuity, strong governance, and ongoing reforms.

Is the valuation line getting blurred between private and PSU banks?

SBIN has undergone a significant transformation, with its RoE rebounding from FY16 lows, aided by improved asset quality, operational efficiency, and technological capabilities, resulting in strong returns vs. top private banks. SBIN has delivered outperformance since Nov’23 with 47% returns vs. 17% returns by Bank Nifty and 46% by the PSU Banks index. Historical concerns, such as high NPAs and slow loan growth, are diminishing as SBIN maintains commendable credit growth and a favorable CD ratio. Despite already delivering impressive returns over prior years, SBIN's consistent outperformance in RoE and leadership position in key operating metrics (details inside) will enable the bank to deliver strong returns.

The stage is becoming bigger: How is SBIN faring globally?

Compared to top global banks, SBIN's performance on key metrics highlights its remarkable turnaround, with the best-in-class RoE and impressive loan growth. SBIN has thus emerged as a standout entity not only in India but also among large global banks. In terms of returns over the past one year, SBIN with 44% return ranks second among the 14 large global banks that we have analyzed. As India progresses toward its goal of becoming a developed nation by 2047, SBIN's strong return ratios and healthy growth momentum should keep investor interest in the bank intact, potentially elevating its position in the global ranking and solidifying its status as a compelling investment opportunity.

Building strong digital capability; YONO emerges as key growth driver

SBIN's commitment to digital innovation includes collaborations with fintech companies and startups, exemplified by initiatives like the API Hub. This digital transformation extends to corporate banking with 'YONO for Business,' offering comprehensive digital solutions, and government banking, facilitating efficient collection and payment mechanisms. SBIN remains a leader in debit card spending, POS terminals, ATM transactions, and mobile banking transactions (both in volume and value terms). SBIN has more than 500m customers with ~74m YONO users. YONO records average daily logins of over 12.8m, with fresh ~13m new registrations in FY24.

Opex set to moderate; estimate C/I ratio to decline to 51% (59% in FY24) SBIN in FY24

witnessed high opex of INR158.8b due to additional provisions for a 17% wage hike settlement and one-off pension provisions, resulting in a C/I ratio of ~59%. With the full impact of wage revision and pension already factored in, the overall wage bill is expected to moderate significantly to INR650-700b in FY25, leading to an anticipated reduction in cost ratios to 51% from 59% in FY24. Additionally, the rationalization of branches and increased usage of digital channels like YONO should boost operating efficiency, facilitating a gradual moderation in cost ratios.

Strengthened underwriting to keep credit costs in check

SBIN's asset quality has seen steady improvements, supported by healthy underwriting and a consistent recovery from the TWO pool. With controlled slippages and the best-in-class slippage rate of 0.6% in FY24, the bank's GNPA/NNPA ratios moderated to 2.24%/0.57% in 4QFY24, while PCR stood 75% (91.9% including  TWO). With a restructured book at 0.5% of loans and a negligible SMA pool, incremental slippages are expected to remain low. The bank's conservative guidance for controlled credit cost at <50bp, with efforts to keep it at 25-30bp, reflects a proactive approach to maintaining strong asset quality. We estimate GNPA/NNPA ratios to moderate to 1.97%/0.48% by FY26E, with credit cost likely to sustain at ~40bp over FY25-26E.

Valuation and view

SBIN remains well positioned to deliver sustainable growth with high profitability, led by healthy loan growth, controlled opex and provisions. The management has guided for broadly stable margins going forward as the bank has levers in place (CD ratio, MCLR re-pricing) to mitigate the impact of the elevated cost of deposits. SBIN is well positioned to sustain its growth trajectory, supported by a low CD ratio, strong underwriting and continued momentum in YONO. The asset quality performance remains strong with consistent improvements in headline asset quality ratios. SBIN is one of our preferred ideas in the sector. We estimate a 15% CAGR in net profit over FY24-26E, with FY26E RoA/RoE of ~1.1%/18.5%. Reiterate BUY with a revised TP of INR1,015 (1.5x FY26E ABV + INR235 from subs).

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