The quarter's performance presents a nuanced picture: whilst profitability moderated, the bank achieved significant improvements in asset quality with gross non-performing assets declining to a multi-year low of 1.73%, down from 1.83% in the previous quarter and 2.13% a year ago. Net interest income grew 4.65% sequentially to ₹42,984.06 crores, underscoring the bank's core lending strength despite margin pressures and elevated provisioning.
The September quarter results reflect the bank's continued focus on balance sheet quality, with management prioritising asset cleaning and provisioning discipline over short-term profit maximisation. Total income for Q2 FY26 reached ₹1,39,572.69 crores, up 3.13% quarter-on-quarter and 8.08% year-on-year, driven by robust growth in interest earned from advances and investments. However, elevated provisions of ₹5,400.12 crores—up 13.47% sequentially—weighed on bottom-line performance, highlighting the bank's proactive approach to risk management in an uncertain economic environment.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Interest Earned (₹ Cr) | 1,19,654 | 1,17,996 | 1,19,666 | 1,17,427 | 1,13,871 |
| Net Interest Income (₹ Cr) | 42,984 | 41,072 | 42,775 | 41,446 | 41,620 |
| Net Profit (₹ Cr) | 16,666 | 19,160 | 18,643 | 16,891 | 18,331 |
| QoQ Change (%) | -13.02% | +2.78% | +10.37% | -7.86% | +7.61% |
| YoY Change (%) | -9.09% | +12.48% | -9.93% | — | — |
| Gross NPA (%) | 1.73% | 1.83% | 1.82% | 2.07% | 2.13% |
| Net NPA (%) | 0.42% | 0.47% | 0.47% | 0.53% | 0.53% |
Financial Performance: Margin Pressures Offset by Volume Growth
State Bank of India's Q2 FY26 financial performance demonstrates the delicate balance between maintaining asset quality and sustaining profitability in a competitive lending environment. Interest earned climbed to ₹1,19,653.93 crores, up 1.41% sequentially and 5.08% year-on-year, driven primarily by advances growth and a larger investment portfolio. Interest on advances contributed ₹86,182.58 crores, reflecting a 0.87% quarter-on-quarter increase, whilst income on investments stood at ₹28,278.73 crores.
The bank's net interest margin, however, remained under pressure, with reported NIM unavailable for Q2 FY26 but previously recorded at 2.90% in Q1 FY26, down from 3.14% in Q2 FY25. This compression reflects the intensifying competition for quality borrowers and rising deposit costs across the banking sector. Interest expended declined marginally to ₹76,669.87 crores from ₹76,923.39 crores in Q1 FY26, providing some relief, but the bank's CASA ratio also deteriorated, with data unavailable for Q2 FY26 after standing at 39.36% in Q1 FY26 compared to 40.03% a year earlier.
Operating profit before provisions and contingencies came in at ₹27,310.92 crores, down 10.59% sequentially but reflecting the bank's disciplined cost management. The decline in operating profit was more than offset by higher provisioning, which jumped to ₹5,400.12 crores from ₹4,759.20 crores in Q1 FY26, as the bank continued to strengthen its balance sheet against potential credit risks. This resulted in profit before tax of ₹26,504.02 crores, up 2.79% quarter-on-quarter, with the effective tax rate at 23.94%.
The bank's advance-to-deposit ratio stood at a healthy 71.90%, indicating efficient deployment of deposits into earning assets. Total advances reached ₹41,63,312 crores as of March 2025, representing a robust 12.40% year-on-year growth from ₹37,03,971 crores in March 2024, whilst deposits climbed to ₹53,82,190 crores, up 9.48% year-on-year. This growth trajectory underscores SBI's dominant market position and its ability to capture market share across both retail and corporate segments.
Asset Quality Excellence: NPAs at Multi-Year Lows
The standout feature of State Bank of India's Q2 FY26 results is the continued improvement in asset quality metrics, with the bank achieving its lowest gross NPA ratio in years at 1.73%, down from 1.83% in Q1 FY26 and significantly lower than 2.13% in Q2 FY25. This represents a 40-basis-point year-on-year improvement, reflecting the bank's rigorous credit underwriting standards, proactive recovery efforts, and the benefits of economic normalisation following the pandemic.
Net NPA ratio improved even more impressively to 0.42% from 0.47% in the previous quarter and 0.53% a year ago, demonstrating the bank's strong provisioning coverage and effective resolution mechanisms. The provision coverage ratio remained robust at approximately 74.49% as of Q1 FY26, ensuring adequate buffers against potential credit losses. This improvement in asset quality has been a multi-year journey for SBI, with gross NPAs declining from 2.24% in March 2024 to current levels, marking a structural improvement in portfolio quality.
Asset Quality Milestone
State Bank of India's gross NPA ratio of 1.73% represents the lowest level in over a decade, positioning the bank amongst the cleanest public sector lenders. The 40-basis-point year-on-year improvement reflects successful resolution of legacy stressed assets and improved underwriting standards. With net NPAs at just 0.42%, the bank's balance sheet quality now rivals many private sector peers, providing a strong foundation for future growth.
The bank's capital adequacy ratio stood at 14.62% in Q2 FY26, marginally down from 14.63% in Q1 FY26 but comfortably above regulatory requirements. The Tier 1 capital ratio improved to 12.67% from 12.45%, indicating strong core capital strength. This capital position provides SBI with adequate headroom for balance sheet expansion whilst maintaining regulatory compliance and absorbing potential credit shocks. The improvement in both capital ratios and asset quality metrics positions the bank favourably for sustained credit growth in the coming quarters.
Return on equity remained healthy at 15.53%, demonstrating efficient capital utilisation and strong profitability relative to shareholder funds. This metric, whilst slightly below some private sector peers, represents a significant improvement from historical levels and reflects the bank's transformation from a legacy-burdened institution to a more efficient, profitable enterprise. Return on assets of 1.08% similarly indicates improving operational efficiency and asset quality.
Provisioning Strategy: Short-Term Pain for Long-Term Gain
The elevated provisioning of ₹5,400.12 crores in Q2 FY26, up 13.47% from ₹4,759.20 crores in Q1 FY26, represents a deliberate strategy by management to strengthen the balance sheet and create buffers against potential economic uncertainties. This approach, whilst impacting near-term profitability, enhances the bank's resilience and positions it to weather potential credit cycles more effectively than in the past.
The bank's provisioning intensity has been consistently higher than the bare minimum required, reflecting a conservative approach to risk management. This is particularly important given SBI's large corporate loan book and exposure to sectors that may face headwinds in a slowing economic environment. The proactive provisioning also provides flexibility for the bank to accelerate loan growth without compromising balance sheet strength.
| Metric | Q2 FY26 | Q1 FY26 | Q2 FY25 | Change (QoQ) | Change (YoY) |
|---|---|---|---|---|---|
| Provisions (₹ Cr) | 5,400 | 4,759 | 4,506 | +13.47% | +19.84% |
| Gross NPA (%) | 1.73% | 1.83% | 2.13% | -10 bps | -40 bps |
| Net NPA (%) | 0.42% | 0.47% | 0.53% | -5 bps | -11 bps |
| Operating Profit (₹ Cr) | 27,311 | 30,544 | 29,294 | -10.59% | -6.77% |
Industry Leadership: Commanding Market Position
State Bank of India's market capitalisation of ₹8,83,416 crores solidifies its position as India's largest public sector bank and one of the most systemically important financial institutions in the country. With an equity capital base of ₹892.46 crores and reserves of ₹4,40,270 crores as of March 2025, the bank commands unparalleled scale advantages in funding costs, distribution reach, and brand equity.
The bank's advance book of ₹41,63,312 crores and deposit base of ₹53,82,190 crores as of March 2025 dwarf those of competitors, providing significant operating leverage. This scale enables SBI to weather margin pressures better than smaller peers whilst maintaining pricing discipline in competitive segments. The bank's extensive branch network of over 22,000 branches and 62,000 ATMs provides a distribution advantage that remains difficult for competitors to replicate, particularly in rural and semi-urban markets.
| Bank | P/E (TTM) | P/BV | ROE (%) | Div Yield (%) | Gross NPA (%) |
|---|---|---|---|---|---|
| State Bank of India | 12.01 | 1.87 | 15.53% | 1.62% | 1.73% |
| Bank of Baroda | 7.83 | 1.02 | 13.09% | 2.87% | — |
| Punjab National Bank | 9.06 | 1.04 | 11.53% | 2.35% | — |
| Canara Bank | 6.80 | 1.17 | 17.21% | 2.87% | — |
| Indian Bank | 10.06 | 1.58 | 15.67% | 1.84% | — |
| Union Bank of India | 6.42 | 0.95 | 14.81% | 3.11% | — |
Compared to public sector peers, State Bank of India trades at a premium valuation with a price-to-book ratio of 1.87x versus the peer average of approximately 1.20x, and a P/E multiple of 12.01x against the peer average of around 8x. This premium is justified by SBI's superior asset quality (gross NPA of 1.73% amongst the lowest in the sector), stronger return on equity of 15.53% (above the peer median), and its dominant market position. The bank's return on equity significantly exceeds that of most PSU peers, reflecting better capital efficiency and operational effectiveness.
However, SBI's dividend yield of 1.62% lags behind most public sector peers, which average around 2.5-3.0%, indicating that the bank retains a larger proportion of earnings for growth and capital strengthening. This lower payout ratio reflects management's focus on building capital buffers to support future expansion rather than maximising near-term shareholder distributions.
Valuation Analysis: Premium Pricing Reflects Quality Transformation
State Bank of India currently trades at a P/E ratio of 12.01x based on trailing twelve-month earnings, representing a significant premium to the public sector banking average of approximately 8x but remaining well below private sector peers that trade at 15-20x earnings. The bank's price-to-book ratio of 1.87x similarly commands a premium to PSU peers (averaging 1.0-1.2x) but trades at a discount to top-tier private banks that command 3-4x book value.
This valuation positioning reflects the market's recognition of SBI's transformation journey—from a legacy-laden public sector institution to a cleaner, more profitable enterprise—whilst acknowledging that it has not yet achieved the operational excellence and return profiles of leading private sector banks. The bank's ROE of 15.53%, whilst strong for a PSU bank, remains below the 17-20% delivered by top private sector peers, justifying the valuation gap.
The stock's current price of ₹957.05 places it just 0.20% below its 52-week high of ₹959.00, suggesting limited near-term upside from current levels. Trading above all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), the stock exhibits strong technical momentum, but the valuation grade of "Very Expensive" assigned by proprietary models indicates that much of the positive news flow is already reflected in the price.
With a PEG ratio of 1.90x, the stock appears reasonably valued relative to its growth trajectory, though not cheap. The five-year net profit CAGR of 45.59% has been exceptional, driven by asset quality normalisation and operating leverage, but sustaining such growth rates will be challenging as the low base effect diminishes and the bank approaches steady-state profitability levels.
Shareholding Dynamics: Government Divestment Creates Opportunity
State Bank of India's shareholding pattern has witnessed notable shifts over recent quarters, most significantly the reduction in government holding from 57.43% in March 2025 to 55.50% by September 2025. This 192-basis-point decline reflects the government's ongoing divestment programme, designed to meet fiscal targets whilst maintaining majority control. The July 2025 quarter saw the bulk of this reduction, with promoter holding dropping from 57.42% to 55.50%.
| Category | Sep'25 | Jul'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 55.50% | 55.50% | 57.42% | 57.43% | 0.00% |
| FII | 9.57% | 9.98% | 9.33% | 9.95% | -0.41% |
| Mutual Funds | 14.23% | 13.83% | 13.02% | 12.16% | +0.40% |
| Insurance | 11.25% | 11.13% | 10.47% | 10.75% | +0.12% |
| Other DII | 2.32% | 2.27% | 2.20% | 2.16% | +0.05% |
| Non-Institutional | 7.13% | 7.28% | 7.56% | 7.56% | -0.15% |
Institutional investor activity reveals divergent trends. Domestic mutual funds have been consistent buyers, raising their stake from 12.16% in March 2025 to 14.23% by September 2025, an increase of 207 basis points. This accumulation reflects growing confidence amongst domestic fund managers in SBI's transformation story and improving fundamentals. With 71 mutual fund schemes holding positions, the stock enjoys broad-based institutional support.
Foreign institutional investors, by contrast, have trimmed positions, with holdings declining from 9.95% in March 2025 to 9.57% by September 2025. The September quarter saw a 41-basis-point reduction in FII stake, potentially reflecting profit-booking after the stock's strong run or portfolio rebalancing in favour of other opportunities. Insurance companies have steadily increased exposure, moving from 10.75% to 11.25%, indicating long-term conviction in the bank's prospects.
The net institutional holding (FII + MF + Insurance + Other DII) stands at 37.37%, up from 35.02% in March 2025, demonstrating strong institutional confidence despite elevated valuations. This institutional support provides a stable shareholder base and reduces volatility, though the high institutional ownership also limits potential for fresh institutional buying to drive further price appreciation.
Stock Performance: Outperformance Across All Timeframes
State Bank of India's stock has delivered exceptional returns across multiple timeframes, significantly outperforming both the Sensex and the broader public sector banking index. Over the past year, the stock has gained 15.33% compared to the Sensex's 5.94% return, generating positive alpha of 9.39 percentage points. However, this underperforms the public sector banking sector's 15.53% return by a marginal 20 basis points.
| Period | SBI Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +2.88% | -1.38% | +4.26% |
| 1 Month | +10.38% | +2.77% | +7.61% |
| 3 Months | +20.29% | +3.01% | +17.28% |
| 6 Months | +19.62% | +3.67% | +15.95% |
| YTD | +20.38% | +6.81% | +13.57% |
| 1 Year | +15.33% | +5.94% | +9.39% |
| 2 Years | +65.54% | +29.67% | +35.87% |
| 3 Years | +61.19% | +36.93% | +24.26% |
| 5 Years | +362.23% | +105.48% | +256.75% |
The medium-term performance has been particularly impressive, with three-month returns of 20.29% (alpha of 17.28 percentage points) and six-month returns of 19.62% (alpha of 15.95 percentage points). Year-to-date, the stock has gained 20.38%, substantially ahead of the Sensex's 6.81% gain. This outperformance reflects improving fundamentals, particularly the sharp decline in NPAs and sustained profitability growth.
Long-term returns paint an even more compelling picture. Over five years, State Bank of India has delivered a staggering 362.23% return compared to the Sensex's 105.48%, generating alpha of 256.75 percentage points. This extraordinary performance reflects the bank's successful transformation from a stressed asset-laden institution in 2019-2020 to a cleaner, more profitable enterprise today. The two-year return of 65.54% and three-year return of 61.19% similarly demonstrate consistent value creation.
From a risk-adjusted perspective, the stock's one-year volatility of 19.84% is higher than the Sensex's 12.45%, but the risk-adjusted return of 0.77 compares favourably to the Sensex's 0.48, indicating superior returns per unit of risk taken. The stock's beta of 0.40 classifies it as a low-beta security, meaning it is less volatile than the broader market—a somewhat counterintuitive finding given the banking sector's cyclicality, but reflecting SBI's large-cap, liquid nature.
Investment Thesis: Quality Improving, Valuation Stretched
State Bank of India's investment case rests on four key pillars: dominant market position, improving asset quality, strong capital adequacy, and operational scale advantages. The bank's transformation from a legacy-burdened institution to a cleaner, more profitable enterprise has been remarkable, with gross NPAs declining from over 7% in 2018 to 1.73% today. This improvement in balance sheet quality has been the primary driver of the stock's multi-year outperformance and provides a solid foundation for future growth.
The bank's scale advantages remain unmatched in the Indian banking sector, with the largest branch network, deposit base, and advance book. This provides significant operating leverage and funding cost advantages that smaller competitors cannot replicate. The extensive rural and semi-urban presence positions SBI to benefit from India's ongoing financial inclusion drive and the government's focus on agricultural credit.
However, the investment thesis faces several headwinds. The valuation grade of "Very Expensive" indicates that much of the positive transformation is already priced in at current levels. With the stock trading near 52-week highs and commanding a premium to PSU peers, the risk-reward ratio appears less favourable for fresh entrants. The near-term financial trend classification of "Flat" reflects the profit moderation seen in Q2 FY26, with elevated provisions likely to continue pressuring earnings in coming quarters.
Net interest margin compression remains a structural challenge, with competitive intensity in the lending market and rising deposit costs squeezing spreads. The bank's CASA ratio has declined from over 41% to under 40%, indicating deposit mix deterioration that could further pressure margins. Whilst management has guided for NIM stabilisation, achieving this whilst maintaining credit growth will require careful pricing discipline.
"State Bank of India's transformation from a legacy-laden PSU bank to a cleaner, more profitable institution is largely complete, but sustaining the next phase of growth amidst margin pressures and elevated valuations presents a more challenging proposition."
Key Strengths & Risk Factors
KEY STRENGTHS
- Market Leadership: Largest PSU bank with unmatched scale, branch network of 22,000+, and dominant market share in deposits and advances
- Asset Quality Transformation: Gross NPA at decade-low 1.73%, down from 2.13% YoY; Net NPA at 0.42%, amongst cleanest in PSU banking
- Strong Capital Position: CAR at 14.62%, Tier 1 at 12.67%, providing ample headroom for growth and regulatory compliance
- Robust ROE: Return on equity of 15.53% demonstrates strong capital efficiency, significantly above historical levels and peer averages
- Institutional Confidence: Total institutional holding at 37.37%, with domestic mutual funds consistently accumulating shares
- Long-Term Performance: Five-year return of 362.23% reflects successful turnaround and value creation for shareholders
- Government Backing: Implicit sovereign guarantee provides funding cost advantages and depositor confidence during stress periods
KEY CONCERNS
- Valuation Stretch: P/E of 12.01x and P/BV of 1.87x represent premium to PSU peers; stock graded "Very Expensive" by proprietary models
- Profit Moderation: Q2 FY26 net profit declined 13.02% QoQ and 9.09% YoY, raising concerns about earnings momentum
- Margin Pressure: NIM compression from 3.14% to 2.90% YoY reflects competitive intensity and rising funding costs
- CASA Deterioration: Current account savings account ratio declined from 40.03% to 39.36%, indicating deposit mix challenges
- Elevated Provisions: Provisions jumped 13.47% QoQ to ₹5,400 crores, suggesting management caution on asset quality outlook
- Limited Upside: Stock trading just 0.20% below 52-week high, suggesting limited near-term price appreciation potential
- Flat Financial Trend: Proprietary financial trend indicator shows "Flat" status, indicating near-term earnings growth challenges
Outlook: What to Watch in Coming Quarters
POSITIVE CATALYSTS
- NIM Stabilisation: Signs of net interest margin bottoming out would support earnings recovery and sentiment improvement
- Credit Growth Acceleration: Sustained 12-15% advance growth whilst maintaining asset quality would drive earnings momentum
- CASA Ratio Recovery: Improvement in low-cost deposit mix would ease funding cost pressures and support margins
- Further NPA Reduction: Continued decline in gross NPAs below 1.50% would reinforce balance sheet strength narrative
- Fee Income Growth: Expansion in non-interest income through digital banking and wealth management could offset margin pressure
RED FLAGS TO MONITOR
- Slippages Uptick: Any increase in fresh NPA formation or slippage ratio would signal deteriorating credit quality
- Margin Compression: Further NIM decline below 2.80% would pressure profitability and raise sustainability concerns
- Provision Coverage Decline: Reduction in PCR below 70% would indicate weakening balance sheet buffers
- Economic Slowdown: Broader GDP deceleration could impact credit demand and increase stress in corporate loan book
- Valuation Correction: Any sector-wide de-rating or PSU bank sell-off could disproportionately impact premium-valued SBI
The outlook for State Bank of India over the next 12-18 months hinges on management's ability to navigate the delicate balance between maintaining asset quality, sustaining credit growth, and defending margins in an increasingly competitive environment. The bank's strong capital position and improved balance sheet provide flexibility, but the premium valuation leaves little room for disappointment.
Key monitorables include quarterly NIM trends, CASA ratio trajectory, slippage ratios, and the bank's ability to grow fee income to offset net interest income pressure. Any signs of economic stress leading to fresh NPA formation would be particularly concerning given the current premium valuation. Conversely, successful margin stabilisation combined with sustained credit growth could justify current valuations and drive further upside.
The Verdict: Quality Franchise, But Valuation Limits Fresh Entry
Score: 65/100
For Fresh Investors: Not recommended for fresh buying at current levels. The stock's valuation grade of "Very Expensive" and proximity to 52-week highs suggest limited near-term upside. Wait for a meaningful correction of 10-15% or evidence of earnings momentum acceleration before initiating positions. The transformation story is largely priced in.
For Existing Holders: Continue to hold positions given the bank's strong fundamentals, improving asset quality, and dominant market position. The long-term investment thesis remains intact despite near-term profit moderation. Use any sharp corrections to accumulate further, but avoid adding at current elevated levels. Set a trailing stop-loss at ₹880-900 to protect gains.
Fair Value Estimate: ₹850-880 (11-15% downside from current levels), based on 10-11x forward earnings and 1.6-1.7x book value, more in line with historical PSU bank premium multiples.
Note: For banks, traditional ROCE calculations are not applicable. Key profitability metrics include Return on Assets (ROA) of 1.08% and Return on Equity (ROE) of 15.53%, which better capture banking sector capital efficiency.
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The views expressed are those of the author and do not necessarily reflect the views of any affiliated organisations.
