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Single digit topline growth: State Bank of India reported a net interest income growth of 5.7% YoY to Rs 41,126 crore, despite a marginal decline in margins on an annualized basis. Total income increased by 13.6% YoY but decreased by 4% QoQ. However, this growth was offset by a significant rise in interest expenses, which grew by 1.5% QoQ and 23.4% YoY due to elevated deposit costs. Operating expenses remained flat on an annualized basis but declined by 14.7% QoQ, attributed to the completion of wage provisions. Despite the moderation in operating expenses, pre-provision operating profit (PPOP) declined by 8% sequentially, though it saw a marginal increase of 4% YoY. Overall, while income growth was healthy, higher interest expenses impacted profitability, and the bank's focus on managing operating costs provided some relief.

NIM seeing a marginal decline: Net interest margin saw slight moderation during the quarter as NIM fell by 11 bps QoQ and YoY basis. The decline in NIM was mainly to increase in cost of deposits by 19bps QoQ/45bps YoY. The management remains confident about the NIM projection in FY25 and expects that NIM would remain around current levels. The bank also expects cost of deposits to stabilize in the coming quarters which shall aid the margins.

Healthy growth in advances: Advances during the quarter increased by 1.2% QoQ/15.4% YoY to Rs 38.12 lakhs cr. The growth in advances was broad based as segments such as retail personal (1.2% QoQ/13.6% YoY), Agri (1.4% QoQ/17.1% YoY) and SME (2.4% QoQ/19.9% YoY) wherein all the segments reported healthy growth. Corporate segment which saw uptick during the last quarter remained flat on sequential basis while increasing by 15.9% on annualized basis. Going forward, the management expects that credit growth will by 14-16% in coming quarters of FY25 which shall remain in-line with the industry.

Rising deposit costs impacts deposit growth: Deposits during the quarter remained flat sequentially, while increasing by 8.2% YoY to Rs 49 lakh crore. The muted growth was primarily due to a decline in current account deposits, which decreased by 14% QoQ and 4.7% YoY, while term deposits saw a modest growth of 0.26% QoQ and 12.2% YoY. The sluggish growth in CASA deposits led to a decline in the CASA ratio, which dropped by 41 basis points QoQ and 218 basis points YoY to 40.7%. In the current environment of rising deposit costs, management has consciously decided not to aggressively pursue deposits at any price, instead focusing on alternatives at better rates. This strategy has contributed to the slower deposit growth.

Valuation and outlook: SBI during the quarter reported steady growth in profitability as employee expenses and provisions moderated. Margins declined sequentially due to higher cost of funds while deposits/advances reported healthy and sustainable growth. The asset quality of the bank continues to remain robust as credit cost remains at cyclical low levels. Financially, we expect its NII/PPOP/PAT to grow at a CAGR of 14.2%/7.6%/7% over FY25-26E. We maintain Buy on the bank with a revised target price of Rs 941 valuing the standalone bank at 1.6x of its FY26E Adj. BV.

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