KRChoksey Research has reiterated a Buy recommendation for State Bank of India (SBI) with an increased target price of Rs 1,020, representing a 20.3% potential upside from the current market price of Rs 848. The updated guidance is based on SBI’s robust Q2FY25 financial performance, improved asset quality, and strong credit growth across sectors. Below is an in-depth analysis of the factors supporting this optimistic outlook.

Solid Financial Performance in Q2FY25 Drives Positive Sentiment

Net Interest Income (NII) and Profit Growth: SBI reported a 5.4% YoY increase in Net Interest Income (NII) to Rs 416,195 million, while net profit surged by 27.9% YoY to Rs 183,314 million. Improved operating leverage contributed to these gains, showcasing SBI’s ability to scale profitably amidst rising credit demand.

Consistent Margin Performance: The Net Interest Margin (NIM) remained stable at 3.2%, supported by growth in the loan portfolio and effective cost management. KRChoksey notes that SBI’s margin consistency bodes well for future profitability, even as competitive pressures in the banking sector intensify.

Strong Credit Growth Supported by Diverse Loan Portfolio

Corporate Lending Expansion: The bank’s credit book expanded by 15.3% YoY, with a 17.4% increase in SME loans and 18.4% growth in corporate advances. These gains were largely driven by key sectors like renewable energy, infrastructure, and steel, as well as ongoing demand in agriculture and retail lending.

Personal Loan Segment Gains: The personal loan portfolio, which makes up 41.9% of SBI’s total advances, reported a 12.3% YoY growth. Home loans led this segment with a 13.7% increase, signaling resilient demand in the retail space despite economic fluctuations.

Improving Asset Quality and Reduced NPA Levels

Decline in Gross and Net NPAs: SBI’s Gross NPA ratio improved to 2.13%, a 42-basis-point reduction YoY, while Net NPAs also declined to 0.53%. This improvement reflects effective risk management practices and disciplined lending, positioning SBI favorably against peers.

Enhanced Provision Coverage: The bank’s Provision Coverage Ratio (PCR) stands at 74.4%, with a further increase to 91.8% including accumulated write-offs. This prudent approach supports SBI’s asset quality, reducing the risk of defaults and ensuring capital adequacy.

Stable Deposit Growth and CASA Ratios Provide Liquidity Support

Deposit Base Strengthening: SBI’s deposit base rose by 9.1% YoY to Rs 51,172,849 million, with domestic Current Account Savings Account (CASA) deposits comprising 40% of the total. This deposit growth reflects SBI’s extensive reach and customer trust, providing a stable funding base for credit expansion.

Strategic Focus on CASA Ratio: The bank’s focus on maintaining a high CASA ratio has helped manage funding costs effectively, despite industry-wide increases in deposit rates. SBI expects to retain this strategy to stabilize margins amid rising cost pressures.

Operational Efficiency Gains and Expense Management

Cost-to-Income Ratio Improvement: SBI’s cost-to-income ratio declined to 48.5% in Q2FY25 from 61.4% in the previous year, aided by lower employee costs and operational efficiencies. This improvement highlights SBI’s commitment to cost optimization, essential for sustained profitability.

Focus on Digital Banking Initiatives: The bank’s investments in digital banking have enabled significant reductions in operational costs. With ongoing digital transformation initiatives, SBI aims to further streamline its operations, enhancing both efficiency and customer experience.

Valuation and Target Price Justification

Revised Target Price Based on Strong Earnings Forecast: KRChoksey’s Rs 1,020 target price reflects an upward revision from Rs 1,010, based on a Price-to-Adjusted Book Value (P/ABV) multiple of 1.5x on FY26E ABV of Rs 529.2 per share. This valuation accounts for SBI’s robust financial health, growth prospects, and its ability to capitalize on India’s economic expansion.

Positive Earnings Outlook: KRChoksey projects a 13.7% CAGR in advances over FY24-26E and a steady 14-16% credit growth rate, supported by SBI’s diverse loan portfolio and strategic initiatives in high-growth sectors.

Risks and Considerations for Investors

Competitive Pressure on Margins: As deposit rates rise across the industry, SBI may face pressure to maintain its NIM in the long term. KRChoksey notes that while the bank’s CASA strategy has mitigated some of these pressures, competitive dynamics could impact profitability.

Regulatory and Economic Risks: Changes in regulatory policies or unfavorable macroeconomic conditions could affect SBI’s loan book and asset quality. However, SBI’s strong capital base and risk management framework offer some protection against these external risks.

Conclusion and Investment Thesis

State Bank of India’s recent financial performance, steady credit growth, and strategic cost management make it an attractive investment opportunity in the banking sector. Key factors supporting the Buy recommendation include:

Robust Revenue and Profit Growth: Consistent earnings growth driven by strong NII and efficient cost management.
Improved Asset Quality: Reduced NPAs and high provision coverage reflect disciplined lending practices and effective risk management.
Expanding Loan Portfolio: Growth across corporate, SME, and personal loans positions SBI well in a growing economy.
Stable Liquidity and CASA Support: A strong deposit base and high CASA ratio provide SBI with stable liquidity for future lending growth.
With a target price of Rs 1,020 and a potential upside of over 20%, SBI is well-positioned for continued success, supported by favorable economic tailwinds and strategic execution.

Disclaimer: Investors should conduct thorough due diligence and consider their risk tolerance before investing in SBI, given the potential impacts of regulatory and competitive factors on future performance.