Why is SBI an underpicked stock?

The State Bank of India (SBI) is India’s largest public sector bank, with a legacy spanning over two centuries. It serves as a financial pillar in the Indian economy, catering to diverse segments, including individuals, SMEs, and corporates. Headquartered in Mumbai, SBI plays a crucial role in driving the nation’s financial inclusion and economic development. 

SBI is the 48^th largest bank in the world by Total Assets and it is India’s Largest Bank.  

Business Overview:  

State Bank of India is the India’s largest bank with a customer base of more than 50 crore+ and a total 7.40+ crore users for its YONO App. 

SBI provide various services, and they are divided into 6 different types:  

1. Personal Banking: SBI offers integrated Personal Banking Services through a wide range of loan products, Saving Accounts, Current Accounts, Salary Packages and even wealth management services. 

2. Rural Banking: This segment focusses on the needs of India’s rural population through financial inclusion, microcredit and agricultural business support. 

3. International Banking Group: Operations in over 30 countries, including the UK, US, Canada, and UAE. Services include forex trading, trade finance, and NRI banking. 

4. Corporate Banking: Offers working capital financing, term loans, and treasury services to corporates. Significant presence in infrastructure financing, energy, and industrial sectors. Custom financial solutions for large and mid-sized businesses. 

5. Rural and Agricultural Banking: Financial support to farmers through Kisan Credit Cards and Agri-loans. Collaborations with government schemes like PM Kisan and Jan Dhan Yojana. 

If we look at the subsidiaries of the SBI, they are as follows:  

There are many subsidiaries of SBI, as shown in the image.  

Source: SBI Annual Report FY 24 

Industry Overview: Public Sector Banks (PSBs) in India have achieved a remarkable milestone by recording their highest-ever aggregate net profit of ₹1.41 lakh crore in the financial year 2023-24. This landmark achievement reflects the sector’s robust turnaround, underpinned by a significant improvement in asset quality.  

The Gross Non-Performing Assets (GNPA) ratio steeply declined, dropping to 3.12% in September 2024. Demonstrating continued momentum, they registered a net profit of INR 85520 crore  in the first half of 2024-25.  

In addition to their stellar performance, PSBs have contributed significantly to shareholder returns, paying a total dividend of INR 61,964 crore over the past three years. This remarkable financial growth underscores the sector’s operational efficiency, improved asset quality, and stronger capital base. 

The Gross NPA ratio of Public Sector Banks (PSBs) has witnessed a remarkable improvement, declining to 3.12% in September 2024 from a peak of 14.58% in March 2018. This significant reduction reflects the success of targeted interventions aimed at addressing stress within the banking system. 

A turning point came in 2015 when the Reserve Bank of India (RBI) initiated the Asset Quality Review (AQR). This exercise aimed to identify and address hidden stress in banks by mandating the transparent recognition of NPAs. It also reclassified previously restructured loans as NPAs, resulting in a sharp increase in reported NPAs. The heightened provisioning requirements during this period impacted the financial parameters of banks, restricting their ability to lend and support productive sectors of the economy. 

Strengths: 

1. Market Share: SBI is India’s Largest Bank and it is havinh major market share in different categories like  

25.04% market share in Debit Card Spends, 26.81% Market share of Mobile Banking no. Of transactions, Market share in NRLM loans among PSBs: 29%, 63% Market share in Central Government Business, The market share of  Bank is at 22.55% in Deposits and 19.06% in Advances. r Bank’s market share in home loans and Auto loans is at 26.5% and 19.8% respectively 
So, all these points clearly indicate the strong foot print of SBI in Banking Industry.  

2. Strong Profit Growth: In FY 24 SBI reported a PAT of INR 61,077 crore which is 21.59% growth compared to the previous years. And the profit for the Recent Quarter 2, FY 25, was ₹ 18,331 crores, up almost 28% YoY. 

If we look at the subsidiaries, they also tell us an interesting story:  

On a consolidated basis, SBI Capital Markets Limited has posted a profit after tax (PAT) of INR 1,630.52 Crore for the year ended 31st March 2024 as against INR 725.39 Crore in the corresponding previous year. 

SBI Life Insurance company also posted a PAT of INR 1,894 Crore in FY2024 against INR 1,721 Crore in FY2023. 

SBI Cards and Payment Services Limited registered PAT of INR 2,408 Crore in FY2024 as compared to INR 2,258 Crore in FY2023. 

Even SBI Funds Management and SBI pension Funds Pvt Ltd posted hefty profits compared to the previous years.  

3. Improving Asset Quality: The State Bank of India (SBI) has shown improvements in asset quality, with gross non-performing assets (NPAs) declining to 2.13% in the second quarter of the current financial year. This is a decrease from 2.21% in June and 2.55% in September 2023. Net NPAs also declined to 0.53% from 0.57% in June 2024 

4. Ownership and support by the GoI: The bank’s major shareholder is the GoI, which held 56.92% stake in the bank as on March 31, 2024. SBI is the largest bank in India in terms of asset size and is designated as one of the domestic systemically important banks (D-SIB) in the country.  

5. Strong and Established Network: The bank had a network of 22,542 branches (241 foreign offices), 82,932 business correspondence outlets, 63,580 ATMs or automated deposit and withdrawal machines (ADWMs), and a customer base of over 50 crore as on March 31, 2024. The resource profile of the bank continues to be healthy, with the bank having a robust CASA proportion of 41.11% as on March 31, 2024, and a strong retail liabilities franchise.  

Risks: 

1. Contingent Liabilities: The latest Contingent Liabilities ratio of STATE BANK OF INDIA is INR 2,397,595 Cr based on Mar2024 Consolidated results. 

2. Interest Rate Risks for SBI 

Interest rate risks arise when changes in market interest rates impact a bank’s profitability, particularly its net interest margin (NIM). SBI’s long-term loans (e.g., housing and corporate loans) are often funded by short-term deposits. Changes in interest rates can disrupt this balance, leading to interest rate mismatches. 

3. High Loan Exposure to Corporates: State Bank of India (SBI) has provided significant loans to the Adani Group, one of India’s largest conglomerates with businesses spanning energy, infrastructure, ports, and mining. While the exact loan figures can fluctuate, reports indicate that SBI’s exposure to Adani Group projects remains substantial, reflecting the group’s strong presence in critical sectors. 

SBI has the largest exposure to the Adani Group among Indian banks, with sanctioned loans of Rs 33,800 crore ($4 billion), according to IIFL Securities, a brokerage. 

Why is SBI though having huge market share having lesser Market cap than HDFC Bank? 

Even as State Bank of India (SBI) has a balance sheet four times the size of HDFC Bank, the market capitalization is just over a third of the private sector lender. SBI, the country’s largest lender, also has a customer base nearly ten times larger than HDFC Bank. The major reasons for this are because of 

Asset Quality and Consistency: 

• HDFC Bank has demonstrated consistently strong asset quality over the years, maintaining low non-performing asset (NPA) levels, which has boosted investor confidence. 

• SBI, on the other hand, has struggled with higher NPAs, which raises concerns among investors about potential credit risks and deteriorating asset quality. 

Loan Growth and Risk: 

• There’s a concern that SBI, due to its government backing, might continue to lend aggressively, especially in uncertain times, potentially leading to higher loan growth. However, this also raises the risk of asset quality deterioration, which dampens investor sentiment. 

• HDFC Bank, in contrast, has been more conservative in its lending approach, focusing on more secure and profitable segments, further adding to its market attractiveness. 

Financials: 

Source: Sceener.in 

SBI’s financial performance shows steady growth in revenue, increasing from ₹220,633 crore in FY16 to ₹439,189 crore in FY24, driven by higher interest and other income. After a dip in net profit in FY17 and FY18 due to likely challenges in asset quality, the bank rebounded strongly, achieving a record net profit of ₹69,543 crore in FY24. Interest income remained stable, while other income consistently grew, reflecting diversified income streams. The upward trend in profitability highlights SBI’s improved efficiency and resilience in recent years. 

And there are some other key terms where we need to focus on:  

1. Slippages: In banking, slippage refers to a loan that becomes a non-performing asset (NPA) because the borrower doesn’t pay interest for more than 90 days. It’s a measure of the number of new loans that have become bad or non-performing over a specific period.  

The Slippages of the bank in Q2 FY 24 stands at 2,831 crores whereas now it stands at 4,871 crores.  

2. EPS: The higher profitability resulted in the growth of EPS, in Q2 FY 24, the EPS was 63.88, whereas now it stands at 81.49 as per Q2 FY 25.  

3. Book Value: The book value of the company is INR 465, whereas the PBV of the company is 1.79, whereas the Industry PBV is just 0.95.  

4. CASA Ratio: As per the recent Q2 FY 25 results, the CASA Ratio stands at 40.03, whereas in Q2 FY24, it stands at 41.88.  Banks should have higher CASA ratios so that they can acquire funds at lower costs and hence it results in better profitability. 

5. NIMs: The NIMs of the Bank have also reduced compared to the previous quarters, now it stands at 3.18% compared with the previous value of 3.31%, which is less compared to the previous quarters. This needs to be increased.  

Shareholding: 

Source: Screener.in 

SBI’s shareholding pattern highlights consistent support and investor trust. Promoter holding has remained stable at around 57.5% since FY19, reflecting strong government backing. FIIs increased their stake from 9.48% in FY17 to 11.09% in FY24, signaling growing global confidence.  

DIIs steadily increased holdings until FY23, peaking at 25.2%, before a slight dip in FY24. Public holding has gradually decreased, indicating consolidation among major stakeholders. Meanwhile, the number of shareholders has more than doubled, from 1.5 million in FY17 to over 3.1 million in FY24, demonstrating rising retail investor interest in SBI’s growth story.  

Growth triggers: 

1. Corporate Credit Growth: Reviving private capex cycle spurs corporate demand for loans, particularly in infrastructure, manufacturing, and renewable energy. 

SBI, being a major lender, benefits from large-ticket corporate loans. 

2. Jan Dhan Yojana: The Jan Dhan Yojana, Aadhaar, Mobile (JAM) trinity has played a transformational role in seamlessly delivering the earmarked benefits through DBT (Direct Benefit Transfer) to the targeted beneficiaries. This channel has been the key enabler in making the DBT story of our country a big success, gaining recognition globally. In the current year, ~68 Crore DBT credits have been effected. By bringing the unbanked masses to the financially included pool, the channel has effectively promoted thrift and saving habits amongst customers, enabling their financial growth. More than 15 Crore BSBD/PMJDY accounts have been opened since inception, with total deposits crossing INR 58,000 Crore. 

SBI is the market leader in PMJJBY, PMSBY and APY amongst all Public Sector Banks. 

3. Positive Economic Scenario Projections: India’s GDP grew by 6.75%–7% in Q1 FY25, driven by strong private consumption and investments. The agriculture sector is set to perform well due to above-normal rainfall, while manufacturing and services remain steady. Inflation is projected at 4.5% for FY25. 

Scheduled commercial banks are seeing stronger deposit growth, now outpacing credit growth—a trend last seen in April 2022. Deposits are expected to grow by 11%–12%, and credit by 12%–13% in FY25. RBI is maintaining comfortable liquidity through proactive market operations, supporting economic stability. 

ESG: 

Environment:  

1. SBI has conducted plantation activities in the Cauvery basin districts of Karnataka and Tamil Nadu tying up with Isha Outreach and also planted 2 Lakh trees in Dindigul district of Tamil Nadu tying-up with Gramium Trust to address the water crisis and to offer an economic solution with significant ecological benefits.  

2. Swachhata Pakhwada: To observe Swachhata Pakhwada Campaign launched by the Government of India, Bank undertook various activities country-wide which included cleanliness of surroundings, beach cleaning, distribution of jute bags, organising no-plastic campaigns, construction of toilets, etc. 

Social:  

1. The company CSR activities has benefitted nearly 55 lakh people, and they had distributed 2300 wheelchairs to PWDs and 4600 sewing machines to unpriviliged women and Upgraded 355 Anganwadi’s. 

2. For FY2024, an amount of H502.32 Crore has been allocated for undertaking CSR activities by Bank of which, an amount of INR 301.24 Crore is allocated to SBI Foundation for undertaking CSR activities in project mode. Bank has undertaken 173 CSR initiatives in 80 Aspirational Districts during FY2024. 

Governance:  

SBI was recognised as the Best Bank in India for the year 2023 by Global Finance Magazine at its 30th Annual Best Banks Awards event at Marrakech, Morocco.  

SBI was awarded Company of the Year Award – 2023 by the ET Awards for Corporate Excellence 2023.  

State Bank of India (SBI), like other major financial institutions, has been involved in some legal and regulatory issues over the years. While there haven’t been many cases of illegal activity directly associated with SBI, the bank has faced controversies and legal challenges, including: 

• One notable example is its involvement in large corporate loan defaults, where several businesses failed to repay loans, leading to a rise in non-performing assets (NPAs). Some of these loans were flagged as fraudulent or misused. 

• For instance, cases related to businesses like Kingfisher Airlines (Vijay Mallya) and Nirav Modi’s PNB scam indirectly affected SBI due to their exposure to these companies. 

• The Panama Papers leak in 2016 revealed that some entities and individuals with links to SBI were involved in offshore accounts, but there were no direct charges against the bank. 

• After the Hindenburg report, concerns were raised regarding the financial health of Adani Group companies and their ability to repay loans, which in turn affected the perception of SBI’s exposure to the group. The value of Adani stocks dropped significantly, creating concerns about the viability of the loans given to Adani. 

• The volatile stock prices of Adani companies added to these concerns, as they could impact the collateral and the ability of the group to service its debt. This has triggered concerns among investors and analysts regarding the risks involved for banks like SBI. 

Conclusion: 

State Bank of India (SBI) is the largest bank in India, with a growing customer base and strong government backing. The bank has also seen an increase in profits, which enhances its appeal. Notably, SBI has made progress in reducing its Non-Performing Assets (NPA), indicating some improvement in asset quality. However, the bank still faces challenges in maintaining consistent margins and further reducing NPAs. If SBI continues to improve its asset quality and profitability, it could show a positive trajectory, though continued monitoring is required. 

Savart is a SEBI-registered investment advisor, founded by Sankarsh Chanda. The purpose of this content is to educate, not to advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.