State Bank of India (SBI) has shown resilience on the margin front in the June quarter, and is confident of maintaining its domestic net interest margin (NIM) at 3% for the fiscal year. This is largely in line with the Q1 reading of 3.02%, which was down 33 basis points year-on-year (y-o-y).
This guidance is noteworthy considering the Reserve Bank of India’s recent jumbo repo cut of 50 bps, which could hurt NIM in the current quarter ending September. Of course, the caveat is that there should be no further cut in the repo rate.
The country’s largest lender’s NIM is likely to expand from Q3, as the benefits start flowing from the savings and term deposits’ repricing and capital raise.
As per the management, SBI’s earning model has built in the benefit from the 100 bps reduction in cash reserve ratio (CRR) to 3% of a bank’s deposits. This will kick-in from September. CRR funds are parked with the RBI and do not earn any interest. The CRR cut should release nearly ₹52,000 crore for SBI, and that should start earning interest income.
SBI’s net interest income (NII) was almost unchanged from a year ago at ₹41,072 crore. The benefit of 10% expansion in interest-earning assets—advances, investments and balances with other banks and call money funds to the tune of ₹59.9 trillion—was eroded by the y-o-y NIM decline for the bank from 3.22% to 2.9%. While NII did not grow, the core fee income showed a strong growth of 11% y-o-y to ₹7,677 crore, giving profit a boost.
The bank booked huge trading gains with the yield on government securities softening. Its credit cost remained benign at 0.47%, almost unchanged from a year ago and the asset quality was stable. Gross non-performing assets (NPAs) and net NPA ratio were stable sequentially at 1.83% and 0.47%, respectively.
SBI raised ₹25,000 crore in July, as fresh equity from qualified institutional placement. The funds have boosted common equity tier (CET)—1 capital of the bank, which allows them to lend more.
Does this mean that the bank’s y-o-y growth of 12% in advances to ₹41.96 trillion in Q1 will pick up further? SBI clarified that the growth in loans has been constrained by demand-side factors, rather than the supply side. SBI guided for 12-13% loan growth, depending on the demand.
Even before the capital raise, there were no constraints on SBI’s ability to fund growth, both in terms of its capital adequacy ratio and liquidity. In terms of liquidity, SBI’s credit-deposit (CD) ratio at 77% for the whole bank in Q1 is lower than 85% of ICICI Bank (whole bank) and 87% for Kotak Bank.
So far in 2025, shares of SBI have fetched 1.4% returns, lagging Nifty Bank’s 8%. Its valuations are facing a constraint too. Motilal Oswal Financial Services values SBI’s subsidiaries and associates at ₹243 a share. If it is deducted from the current market price, the stock is available at ₹561. Considering Motilal estimates SBI’s adjusted book value at ₹566 for FY27, the stock is currently trading below its adjusted book value. Leading private sector banks such as HDFC Bank and ICICI Bank are quoting at least twice of their adjusted book value.
The answer for lower valuation of SBI lies in the lower return on its average assets (RoAA) of about 1%, as against the near 2% of its private sector peers. However, SBI is ahead of the private lenders in terms of its return on average equity (RoAE).
This indicates the Street has made its preference clear in terms of choosing between RoAA (similar to ROCE, the return on capital employed for non-banking firms) and RoAE, by giving an increased multiple to banks with a higher RoAA.
Disclaimer: The author holds a position in SBI shares.
