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Delivering all-round performance!

Balance sheet remains pristine; RoA to sustain at 1.1% by FY27E

* State Bank of India (SBIN) has delivered a strong all-round performance as earnings and balance sheet have compounded at a healthy rate over past few years. The bank has made conscious efforts to strengthen its underwriting and bank maintains best-in-class SMA profile.

* SBIN is well positioned to deliver 12-13% loan growth cagr over FY25-27E, aided by its focus on a high-quality, granular loan portfolio. The bank’s near-term growth may remain even stronger as it focuses on optimizing its CD ratio and gaining market share in advances.

* The bank reported GNPA/NNPA ratios of 2.13%/ 0.53% in 2QFY25. While the macro environment is seeing some pressure, we believe that strong underwriting, dominance of secured product mix and controlled SMAs will keep asset quality ratios stable over FY25-27E. We estimate credit costs to remain under control at 45-50bp over FY25-27, enabling steady earnings.

* We believe that SBI is better positioned to navigate through systemic pressures in respect to loan growth (12-13% growth cagr, 68% domestic CD ratio), margins (outlook broadly stable, more than 40% mix of MCLR loans) and robust asset quality (~9% mix of unsecured loan with dominance of government employees).

* We, thus, estimate SBI to deliver 12% CAGR in earnings over FY24-27, resulting in FY27E RoA/ RoE of 1.1%/17.3%. SBIN remains one of our preferred ideas in the sector, and we reiterate our BUY rating with a TP of INR950 (premised on 1.2x FY27E ABV).

Earnings trajectory robust; estimate 12% earnings CAGR over FY24-27

SBIN has demonstrated a robust performance with PAT surpassing INR600b in FY24 and an estimated INR711b in FY25, reflecting a strong three-year earnings CAGR of 36% and an average RoA of ~1%. This growth is driven by robust asset quality, healthy credit growth, and resilient margins. SBIN’s earnings outlook is supported by steady loan growth backed by its robust liability franchise, stable margins, and controlled credit costs. We thus estimate the bank to deliver FY27E PAT of INR869b, implying a 12% earnings CAGR over FY24-27E. The bank’s emphasis on maintaining a balanced mix of RAM segments, along with its ongoing investments in operational efficiency, digital transformation, and risk management, positions it favorably for sustained leadership in the sector.

Healthy growth with superior underwriting; guides 14-15% growth

SBIN has delivered consistent loan growth, with ~16% YoY growth (following 17% YoY growth in FY23). The bank continues to focus on building a granular and highquality loan portfolio. Its retail business, which accounts for ~36% of the total loan book, grew at a modest 12% YoY in 1HFY25, with slower growth in Xpress credit, though personal loan growth showed healthy traction led by growth in secured credit. The wholesale segment is experiencing a healthy recovery driven by increased demand and higher utilization. Meanwhile, the SME sector has recorded an impressive growth of 17.4%. With a strong credit pipeline of INR6t, SBIN is well-positioned to expand its corporate loan book, targeting 14-15% growth. This growth is expected to outpace systemic credit growth, allowing the bank to gain a healthy market share under the leadership of Mr. C S Setty.

Liability franchise robust; a low CD ratio puts SBIN in an enviable position

SBIN has steadily grown its deposit base, with an 11% YoY increase in FY24 and 9% YoY rise in 1HFY25, and expects to surpass 10% growth in deposits, focusing on SA growth, as its current account (CA) growth has already reached 10% YoY. The bank maintains its leadership in deposits, holding a ~24% market share in 1HFY25, and is well poised to deliver ~11% CAGR in deposits over FY25-27E, with a continued emphasis on granular retail deposits. SBIN is also well-positioned in the current tight liquidity environment, with a low domestic CD ratio of ~67.9%, enabling sustainable credit growth. The bank’s LCR stands at a comfortable 130%. While, as per a draft circular on LCR, this could be affected by up to ~13%, the impacts on margins (~3 bp) and return on assets (~1 bp) are expected to be minimal according to the assessment we published in our note titled “Assessing impact of draft LCR guidelines: RoA to dip by up to 8bp; incremental deposits required at INR2.7t”.

Margins to remain broadly stable; MCLR-linked portfolio shields SBIN from interest rate cuts

The bank reported a NIM of 3.14% in 2QFY25 and expects NIMs to remain broadly stable, supported by factors such as its controlled CD ratio and lagged repricing of the MCLR portfolio. With over 40% of its loan portfolio being MCLR-linked and its Tbill holdings benefiting from rate adjustments, SBIN is well-positioned to manage any rate cuts effectively. While the shift towards repo-linked loans may slightly increase the yield impact as the rate cycle turns, SBIN is relatively insulated due to its healthy MCLR-linked portfolio. A 50bp reduction in the repo rate would likely result in an impact of ~6bp on NIM in FY26 and ~4bp in FY27, with corresponding PAT impacts of ~3.4% and ~2.3%, respectively (refer to our note titled “BANKS: Scenario Analysis: Assessing earnings trajectory as rate cycle turns”). We estimate SBIN to deliver ~12% NII CAGR over FY25-27.

Digitalization to help contain costs; estimate C/I ratio of ~49% by FY27

SBIN is focused on enhancing operating efficiency, leveraging digital technology for customer convenience, and competing with disruptive tech to manage costs. With the full impact of wage revisions and pensions absorbed in FY24, SBIN’s opex declined 11% YoY in 2QFY25, and we estimate total opex to decline 10% YoY in FY25. Management aims to maintain a C/I ratio below 50%, with a focus on reducing overheads and boosting other income streams along with an emphasis on improving productivity levels. The rationalization of branches and increased digital channel usage, particularly YONO, are expected to drive further improvements in operational efficiency, leading to a reduction in cost ratios to ~49% by FY27E from 59% in FY24.

Asset quality healthy; estimate credit costs to remain in control

The bank has shown consistent improvement in asset quality, supported by strong underwriting and recovery from the TWO pool. The bank’s GNPA/NNPA ratios improved to 2.13%/0.53% in 2QFY25, with a PCR of 75.7% (92.2% including TWO). SBIN reported a best-in-class slippage rate of 0.6%, and its restructured book stood at INR148b (0.4% of loans). While the SMA pool increased due to a government sector account, the bank has guided controlled credit costs and contained slippages. We expect fresh slippages to remain in control, aided by further improvement in underwriting and healthy recoveries enabling slight moderation in GNPA/NNPA ratios to 2.0%/0.5% by FY27E. We model credit costs to remain below the long-term trends at around 50bp over FY26-27E.

Valuation and view: RoA/RoE at ~1.1%/17.3%; reiterate BUY

SBIN has delivered a robust set of performance in recent years, propelled by steady business and revenue growth as well as controlled provisions. NIM has contracted in recent quarters, and the management has guided for broadly stable margins going forward. This is because the bank has levers in place (CD ratio, MCLR re-pricing, et al.) to mitigate the impact of the rising cost of deposits. SBIN’s asset quality remains healthy with consistent improvements in headline asset quality ratios, while the restructured book remains under control at 0.4% of loans. We estimate credit costs to remain in check at ~50bp, enabling a 12% earnings CAGR over FY24-27. We, thus, estimate SBIN to deliver RoA/RoE of ~1.1%/17.3% in FY27. SBIN remains our preferred BUY in the sector with a TP of INR950 (premised on 1.2x FY27E ABV).

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