State Bank of India continues to demonstrate operational resilience amid a challenging interest-rate environment, but stretched valuations are prompting caution. Geojit Investments has downgraded the stock from BUY to HOLD, citing valuation expansion beyond historical norms even as credit growth remains robust. Q2FY26 results reflect stable core performance, steady asset quality improvement, and disciplined balance-sheet management. However, margin compression, rising operating costs, and limited near-term upside have led the brokerage to set a 12-month target price of Rs. 1,076, implying a modest 10% upside from current levels.

Geojit Shifts Stance to HOLD as Valuations Move Above Comfort Zone

Geojit Investments has revised its rating on State Bank of India from BUY to HOLD, underscoring that valuation—not operational weakness—is the key driver behind the downgrade. SBI currently trades at 1.32x FY27E adjusted book value, a level that stands more than one standard deviation above its five-year historical average.

While the bank’s long-term structural story remains intact, Geojit believes the recent rally has already priced in much of the near-term earnings visibility. The revised target price of Rs. 1,076 is derived using a Sum-of-the-Parts (SOTP) framework that captures the value of SBI’s core banking operations and its listed subsidiaries.

Q2FY26 Earnings Show Stability, but Margin Pressure Persists

SBI delivered a resilient Q2FY26 performance, albeit with visible margin compression. Interest income grew 5.1% year-on-year to Rs. 119,654 crore, supported by expanding loan volumes and stronger retail and SME momentum. Net interest income rose a modest 3.3% YoY to Rs. 42,984 crore.

However, the benefit was partly offset by a 6.1% YoY rise in interest expenses, driven by higher deposit costs. As a result, net interest margin contracted by 25 basis points YoY to 2.93%, reflecting the ongoing pressure across the banking sector as deposit repricing outpaces asset yields.

Segmental Performance Highlights Retail Strength

Retail banking once again emerged as SBI’s growth engine. Retail advances expanded 2.7% YoY to Rs. 64,562 crore, supported by sustained traction in home loans, SME credit, and personal lending.

Corporate banking growth remained subdued at 0.1% YoY, while treasury income declined 2.9% YoY, reflecting softer trading gains and normalization in bond yields. Despite these pressures, management reaffirmed confidence in maintaining 11–12% credit growth over the medium term, anchored by diversified demand across segments.

Operating Costs Weigh on Profitability

Cost pressures were a notable drag during the quarter. Pre-provision operating profit declined 6.8% YoY to Rs. 27,311 crore, as operating expenses climbed 12.3% YoY. Investments in digital infrastructure, branch expansion, and employee-related costs continued to weigh on near-term profitability.

Adjusted profit after tax fell 15.1% YoY to Rs. 15,566 crore, excluding a one-time gain of Rs. 4,593 crore from the sale of SBI’s stake in Yes Bank. On a reported basis, profit growth remained positive, but the underlying earnings trajectory moderated.

Asset Quality Metrics Continue to Strengthen

SBI’s balance-sheet quality continues to improve steadily. As of September 2025, the gross NPA ratio declined to 1.73%, down from 2.13% a year earlier, while net NPAs reduced to 0.42%.

Provision coverage remained strong at 92.29%, offering a meaningful buffer against potential credit shocks. Slippages moderated further, and credit costs remained contained at 0.39%, reinforcing management’s assertion that asset-quality risks are structurally lower than previous cycles.

Deposits and CASA Franchise Remain Strategic Strengths

Total deposits grew 9.3% YoY to Rs. 55.9 lakh crore, supported by growth across savings and current accounts. The CASA ratio stood at 39.63%, underscoring the bank’s ability to attract low-cost funding even in a competitive deposit environment.

Management highlighted continued focus on liability franchise strengthening, rural penetration, and digital engagement through YONO 2.0, which remains central to customer acquisition and cross-selling.

Guidance Signals Confidence in Medium-Term Earnings

SBI has guided for 12–14% credit growth in FY26, supported by retail momentum and improving corporate demand. Management expects margins to stabilize and potentially expand, assuming no further rate cuts, aided by borrowing repricing and CRR normalization benefits.

Long-term guidance remains anchored around maintaining NIM above 3% through the cycle, while return ratios are expected to normalize as capital levels strengthen.

Valuation Breakdown: SOTP Framework Supports Rs. 1,076 Target

The valuation incorporates a 20% holding company discount, reflecting execution and monetization risks associated with subsidiary stakes.

Investment Levels and Market View

Current Market Price (CMP): Rs. 982
12-Month Target Price: Rs. 1,076
Expected Upside: ~10%

Geojit advises investors to hold existing positions, citing limited risk-reward at current levels. Fresh accumulation may be considered only on meaningful corrections.

Bottomline for Investors Interested in Public Sector Banks: Strong Franchise, But Returns May Consolidate

State Bank of India remains one of India’s most formidable financial institutions, combining scale, digital depth, and balance-sheet strength. Credit growth remains healthy, asset quality continues to improve, and subsidiaries add meaningful long-term value. Yet, with valuations now stretched and margins under pressure, the stock appears poised for consolidation rather than aggressive upside. For investors, patience—not pursuit—may be the prudent strategy at this stage.