IT’S BEEN A promising start for the 27th chairman of India’s largest bank, State Bank of India (SBI), which holds a commanding 23% market share by assets and a 25% share of the total loan and deposits market. Since taking over the top job in August 2024, 59-year-old Challa Sreenivasulu Setty has presented some impressive second-quarter statistics for the current fiscal, reinforcing SBI’s position as a banking powerhouse.

To begin with, the bank’s deposits crossed a significant milestone of ₹50 lakh crore, reaching ₹51.17 lakh crore. “We are humbled to serve one out of every three Indians, and I take pride in saying that our bank, in some manner, touches every Indian family,” Setty told analysts at a post-earnings meet. The statement underscores the bank’s extensive reach and its integral role in India’s financial ecosystem.

More importantly, profit during the quarter surged 28% year-on-year to ₹18,331 crore, beating Street estimates of ₹15,550 crore. Return ratios — return on assets (RoA) and return on equity (RoE) — for the half-year (H1 FY25) stood at 1.13% and 21.78%, respectively. Asset quality remained pristine, with net non-performing assets (NPAs) decreasing by 5% over the year-ago quarter to ₹20,294 crore, improving the bad loan ratio to 0.53% on a gross loan book of ₹39.2 lakh crore.

Legacy Of Strength, Reach

E.A. Sundaram, executive director and chief investment officer at BugleRock Capital, a wealth and asset management firm, highlights SBI’s formidable position in the banking sector. He notes that one-fourth of the country’s population banks with SBI, emphasising its reach and the stronghold it has over government accounts, including those of Central and state government employees, police, military, and paramilitary forces.

Sundaram also points out to SBI’s 210-year history, which has seen the bank navigate through various economic cycles, bolstering investor confidence. It is a market leader in multiple lending segments, including home, auto, personal and agricultural loans, making it an almost unbeatable franchise in terms of retail recall in financial services.

Interestingly, Setty also mentioned that though government contribution remains significant, the bank wants to court more businesses (current accounts) not as individual deposit accounts but as a multi-service-oriented product which includes cash management, POS machines, QR code and so forth. “I think the renewed focus through the transaction banking hubs has also helped,” he said.

Since 2010, when the annual Fortune 500 India listing began, SBI has consistently featured in the top 10. This year, ranking fifth, it is the only constituent in the over ₹5-lakh-crore total income club to have shown an impressive double-digit total income growth of 25.60%. This achievement highlights SBI’s ability to grow even in challenging economic environments. While the bank has maintained its financial leverage at 16x over FY10-24, it’s only in FY24 that its return on equity crossed 20% to 20.32%, the first time in its history. It’s a commendable turnaround for a bank that only seven years back (FY18) had subsumed five domestic subsidiaries — State Banks of Bikaner & Jaipur, Mysore, Travancore, Patiala, and Hyderabad — besides Bharatiya Mahila Bank. Consequently, ₹65,523 crore of bad loans were added to its books, resulting in a loss of ₹4,556 crore in the same fiscal.

Since then, the bank has only gained in heft, with its total assets more than doubling from ₹33.26 lakh crore to ₹67.47 lakh crore as of March 2024, with total deposits of ₹49.67 lakh crore and advances of ₹37.84 lakh crore. Profits more than trebled from ₹22,405 crore in FY21. Not surprisingly, the market cap of the country’s largest bank has more than doubled, reflecting investor confidence in its growth trajectory.

Momentum Continues…

The momentum has continued in Q2 of FY25 as well. In the earnings call, Setty highlighted that domestic advances have grown 15.55% YoY, driven by a 18.35% growth in corporate, 17% in agriculture and SME, and 12.32% in retail segments. This balanced growth across sectors underscores SBI’s diversified lending portfolio and its ability to capitalise on opportunities in various segments of the economy.

Adding solidity is the fact that the bank’s capital adequacy position should be able to support about 20% expansion in its loan book. Considering that it has set a target of 13-15% loan growth for FY25, it may be able to avoid equity dilution at least in FY25. The chairman told analysts the bank remains well-capitalised, with a capital adequacy ratio of 13.76% without considering plough-back of profits, and 14.79% if profits for H1 FY25 are included.

… But Challenges Ahead

Despite its impressive turnaround and robust growth from FY18 to FY24, SBI faces several challenges that require strategic attention. One significant concern is the rising cost-to-income ratio, which increased from 50.18% in FY18 to 55.66% in FY24. This upward trend indicates that the bank’s operating expenses are growing faster than its income, potentially impacting profitability if not managed effectively. To enhance its profit margins, SBI needs to focus on streamlining operations and controlling expenses to improve operational efficiency.

Another area of challenge is the decline in the current account savings account (CASA) ratio, which dropped from 45.68% in FY18 to 41.11% in FY24, and has further fallen to 40.04% as of H1 FY25. A lower CASA ratio suggests a higher reliance on term deposits, which are costlier compared to current and savings accounts. This shift can adversely affect the net interest margin (NIM), as the cost of funds increases. After peaking at 3.37% in FY23, SBI’s NIM slightly decreased to 3.28% in FY24, and further to 3.18% in Q2 FY25, indicating pressure on the bank’s ability to earn from its lending activities relative to its interest costs. Enhancing low-cost deposit mobilisation is crucial for SBI to improve NIM and profitability.

However, some industry experts express reservations about SBI’s future growth potential. Sampath Reddy, founder and CIO of Azurean and former CIO of Bajaj Allianz Life Insurance, believes given SBI’s immense size, it may not achieve supernormal growth due to the inherent limitations that come with being a market leader. “While SBI has been a better performer within PSBs, the overall PSU banking space faces challenges while competing with private sector banks, particularly in terms of growth and aggressiveness,” says Reddy.

In the larger banking landscape, concerns about the “war around deposits” and whether it’s structural or cyclical are prevalent. Sundaram believes market dynamics will normalise, with the importance of bank deposits being re-realised when equity market returns stabilise or decline.

Reddy acknowledges that deposit growth has been a challenge for banks due to increased competition as interest rates rise. However, he notes that SBI’s extensive network and government backing will help it grow in line with the industry, even if it may grow at a slightly slower pace due to its size.

Valuation, A Different Story

When it comes to investment attractiveness at current valuations, Sundaram urges caution. He suggests that while SBI is a robust institution poised to compete effectively, its current valuation may not offer the same margin of safety as it did a few years ago. In FY21, SBI’s stock was available for less than ₹200, making it an attractive investment at that time due to gross undervaluation. “Now, with the stock trading around its long-term average price-to-book value, it is not as compelling from a value investment perspective,” feels Sundaram.

Reddy shares a similar view and points out that PSU banks, including SBI, generally trade around book value because their return on equity (RoE) is not very high compared to private banks. While RoEs may look better currently due to recent clean-ups, historically, PSU banks have had subpar cumulative RoEs over the past 5-10 years.

Future-safe

Both experts, however, agree SBI will continue to be a strong player in the banking sector. Sundaram remains optimistic about its ability to compete effectively, citing its strong organisation and extensive branch network of 22,000, which positions it well to capture future growth opportunities, especially when deposit growth normalises.

However, they both reiterate that from an investment perspective, valuation and growth potential are critical considerations. “The arbitrage of valuation that favoured buying SBI stock available four years ago is no longer available. The price at which it is available today, I’m considerably less enthusiastic about buying SBI, although as a bank it will continue to do well,” opines Sundaram. Reddy emphasises that SBI’s immense size limits its growth prospects compared to smaller, more agile private banks.

The bank’s impressive financial performance, extensive reach, and strong competitive position make it a formidable institution. However, from an investment perspective, valuation plays a critical role. While SBI’s fundamentals remain strong, the current valuation may not offer the same margin of safety it did a few years ago.

But despite the complexities surrounding valuation, SBI will continue to be a key player to watch in India’s ever-evolving banking landscape and unfolding economic narrative.