Kotak Institutional Equities has reiterated a BUY recommendation for State Bank of India (SBI) with a current market price (CMP) of Rs 806 and a fair value (FV) target of Rs 975. The bank’s FY2025 performance showcased robust asset quality and a strong balance sheet, despite pressures on net interest margins (NIMs) and slower loan growth. Near-term challenges include margin compression and subdued loan expansion, but SBI’s structural advantages, healthy capital ratios, and resilient underwriting position it favorably for long-term outperformance. With mid-teen return on equity (RoE) projected and attractive valuations, SBI remains a top pick in the Indian banking sector.

BUY Call and Valuation Summary

Kotak Institutional Equities, a leading research house in India, has maintained its BUY call on State Bank of India (SBI). The current market price (CMP) stands at Rs 806, while the fair value (FV) target is set at Rs 975. This valuation is underpinned by a 1.5x adjusted book value and 10x March FY2027E earnings per share (EPS), implying a RoE of approximately 15%. The bank’s market capitalization is robust at Rs 7.19 trillion, with a three-month average daily trading value of Rs 10.1 billion.

Levels for Investors:
CMP: Rs 806
Fair Value Target: Rs 975
52-Week Range: Rs 680 – Rs 899

Key Takeaways from FY2025 Performance

SBI’s FY2025 annual report reveals a bank navigating cyclical headwinds with commendable resilience. The main highlights include:

NIM Compression and Loan Growth Slowdown:
Net interest margin (NIM) declined by about 15 basis points year-over-year, leading to slower net interest income (NII) growth. Loan growth moderated to 12% year-over-year, though this was supported by broad-based contributions from segments such as SME.

Cost Efficiency and Earnings Growth:
Lower cost growth aided earnings, with profit after tax (PAT) rising 16% year-over-year. The conversion ratio of operating profit to net profit remained healthy at 65%, similar to the previous year’s 70%.

Asset Quality Remains Strong:
Credit costs remained below the long-term average at 40 basis points, with slippages unchanged year-over-year at 60 basis points—the lowest in the industry. The bank managed unsecured loan risks effectively, with outcomes better than feared.

Capital Position:
The CET-1 ratio improved to 11.1%, and RoE held steady at 17%, reflecting strong capital accretion and prudent risk management.

Cyclical Challenges and Structural Shifts

The lending landscape is undergoing a structural transformation, with traditional metrics like credit costs and asset quality giving way to NIM, loan growth, and earnings quality. SBI has demonstrated robust underwriting, outperforming expectations during the slowdown. However, FY2026 is expected to witness earnings headwinds due to NIM compression from the ongoing rate cycle. The bank is likely to defend its 1% return on assets (RoA) through treasury gains and recoveries, with marginal growth ahead of the industry. Relief is anticipated in FY2027 as the cost of funds eases, supporting better earnings growth.

Asset Quality and Credit Risk Outlook

SBI’s asset quality metrics are at their best in two decades. The gross non-performing loan (NPL) ratio stands at 1.8%, with net NPLs at 0.5%—both at historic lows. Provision coverage remains robust at 74% (excluding write-offs), providing a substantial buffer against potential stress. The bank’s exposure to risky segments is limited, with the retail portfolio largely composed of salaried government and top-tier corporate employees. The corporate NPL cycle appears to be behind the bank, and there are no visible excesses in any credit segment.

Key Asset Quality Metrics:

Gross NPL Ratio: 1.8%

Net NPL Ratio: 0.5%

Provision Coverage Ratio: 74% (ex-write-offs), 92% (incl. write-offs)

Slippage Ratio: 0.6%

Credit Costs: 40 bps (FY2025), expected to normalize to 55-60 bps (FY2026-28E)

NIM Trajectory and Funding Dynamics

NIMs are under pressure due to the recent 100 basis point cut in the repo rate, which has led to swift repricing of the loan book but a slower adjustment in deposit costs. SBI’s NIM declined by 15 bps in FY2025 to 2.8%, with a further modest decline expected in FY2026. The bank’s large share of low-cost CASA deposits, ample liquidity, and a comfortable credit-deposit (CD) ratio of 77% (domestic CD ratio 70%) provide a cushion against margin compression. NIM recovery is anticipated in the latter half of the rate cycle as deposit rates adjust lower.

Non-Interest Income and Fee Growth

Non-interest income remains a key driver of profitability. Treasury gains are expected to benefit from declining bond yields, while fee income is set to receive a boost from growth in unsecured personal loans. The contribution from recoveries on written-off loans is likely to remain healthy, though it may moderate as large account resolutions taper off. Loan processing fees have rebounded, offsetting weak performance in LC/BG commissions.

Cost Management and Operational Efficiency

Operating expenses declined 5% year-over-year in FY2025, driven by a normalization of staff costs after one-off items in FY2024. The cost-to-income ratio remains elevated at 52%, but further improvement is expected as the bank leverages technology and shifts more operations to subsidiaries. The employee base is shrinking, and per-employee costs are rising, but the shift to a defined contribution pension scheme reduces future cost volatility.

Capital Adequacy and Growth Prospects

SBI’s capital position is robust, with a CET-1 ratio of 10.8% and overall CAR at 14.3%—well above regulatory requirements. The bank’s risk-weighted asset (RWA) density has increased slightly due to a shift in loan mix and higher risk weights on unsecured loans and NBFC exposures. Capital is not a constraint for near-term growth, and the bank’s listed subsidiaries add value to its franchise.

Forecasts and Valuation

Kotak’s forecasts for SBI are conservative, with no upside from potential treasury and recovery gains factored in. The bank is expected to deliver mid-teen RoE over the medium term, with scope for positive surprises if revenue or credit cost outcomes exceed expectations.

SBI Cards: A Mixed Bag

SBI Cards, a key subsidiary, faced a challenging FY2025 with sluggish growth in credit card outstanding (10% yoy) and spends (1% yoy), partly due to regulatory restrictions on corporate card usage. Earnings declined 20% yoy as higher provisions offset operating profit growth. The company ended the year with a 15% RoE and 3.1% RoA. Credit quality remains a concern, but recent cohorts show improvement, and management expects better performance ahead. The share of UPI-based spends is rising, particularly in Tier-2 and Tier-3 cities, supporting future growth.

Investment Thesis and Risk Assessment

Why Buy SBI?
SBI offers a compelling investment case due to its strong balance sheet, resilient asset quality, and structural advantages. The bank is well-positioned to navigate near-term margin pressures and is expected to deliver sustainable mid-teen RoE. Valuations remain attractive, with scope for expansion from current levels.

Key Risks:

Margin Compression: Prolonged NIM pressure due to rate cuts.

Credit Cost Normalization: Potential rise in credit costs as the cycle matures.

Operating Expense Volatility: Historical difficulty in forecasting staff and pension costs.

Conclusion: Actionable Insights for Investors

Kotak Institutional Equities’ BUY call on SBI is anchored in the bank’s robust fundamentals, attractive valuation, and structural resilience. With a fair value target of Rs 975 and a current price of Rs 806, the stock offers meaningful upside potential. Investors should monitor NIM trends, credit cost normalization, and operational efficiency gains. SBI remains a top pick in the Indian banking sector, poised for long-term outperformance despite cyclical headwinds.