State Bank of India Q2 FY26: Profit Dips Despite Strong NII Growth as Provisions Surge

The quarter witnessed a mixed bag of operational achievements and challenges. While the bank's net interest income expanded 4.65% sequentially to ₹42,984.06 crores and interest earned reached ₹1,19,653.93 crores, the sharp increase in provisions to ₹5,400.12 crores weighed heavily on bottom-line growth. The bank's gross NPA ratio improved to 1.73%, the lowest in recent quarters, signalling strengthening asset quality. However, the CASA ratio slipped to 39.63%, down from 40.03% in the year-ago quarter, reflecting intensifying competition for low-cost deposits.

The quarter's performance reflects the challenging operating environment faced by India's banking sector, characterised by margin pressures, rising funding costs, and the need for prudent provisioning. SBI's strategic focus on maintaining asset quality whilst navigating competitive pressures has resulted in a cautious approach that prioritises long-term stability over short-term profitability.

Financial Performance: Provisions Overshadow Revenue Growth

State Bank of India's Q2 FY26 financial performance presents a nuanced picture of resilience amidst headwinds. Total income for the quarter stood at ₹1,39,572.69 crores, registering a sequential growth of 3.13% and year-on-year expansion of 8.08%. Interest earned climbed to ₹1,19,653.93 crores, driven by robust advances growth and improved yields. However, interest expended remained elevated at ₹76,669.87 crores, reflecting the continued pressure on funding costs in a competitive deposit market.

The bank's net interest income of ₹42,984.06 crores marked a healthy 4.65% quarter-on-quarter increase and 3.28% year-on-year growth. This expansion was supported by strong lending momentum, with advances reaching ₹41.63 lakh crores as of March 2025, representing robust growth from ₹37.04 lakh crores a year earlier. Despite this, the net interest margin compressed to 2.97% in Q2 FY26 from 3.14% in the year-ago quarter, underscoring the margin pressure that has become characteristic of the current banking cycle.

The most significant drag on profitability came from provisions and contingencies, which surged to ₹5,400.12 crores in Q2 FY26 from ₹4,505.73 crores in the year-ago quarter, representing a 19.85% year-on-year increase. This elevated provisioning, whilst prudent from a risk management perspective, directly impacted the bottom line. Operating profit before provisions stood at ₹27,310.92 crores, down from ₹29,293.74 crores in Q2 FY25, reflecting the dual impact of margin compression and higher operating expenses.

The tax outgo for the quarter amounted to ₹6,344.35 crores, representing an effective tax rate of 23.93%. Profit before tax stood at ₹26,504.02 crores, up 6.92% year-on-year but reflecting the impact of higher provisions. The final net profit of ₹16,665.94 crores, whilst declining sequentially and year-on-year, must be viewed in the context of the bank's conservative provisioning strategy and focus on maintaining asset quality standards.

Asset Quality: Continuing Improvement Amidst Prudent Provisioning

One of the standout positives in SBI's Q2 FY26 results was the continued improvement in asset quality metrics. The bank's gross NPA ratio declined to 1.73%, the lowest level in the past eight quarters, down from 2.13% in the year-ago quarter. This represents a substantial 40 basis points year-on-year improvement and underscores the effectiveness of the bank's resolution and recovery mechanisms. In absolute terms, gross NPAs have been trending downward, reflecting improved underwriting standards and proactive management of stressed assets.

The net NPA ratio stood at 0.42%, down from 0.53% a year earlier, indicating strong recovery efforts and write-offs. The provision coverage ratio remained healthy at 75.79%, up from 75.66% in Q2 FY25, providing a robust buffer against potential future stress. This high coverage ratio demonstrates SBI's prudent approach to risk management and its commitment to maintaining balance sheet strength even at the cost of near-term profitability.

The bank's capital adequacy ratio stood at 14.62% as of September 2025, with Tier 1 capital at 12.67%, both comfortably above regulatory requirements. This strong capital position provides SBI with adequate headroom for balance sheet expansion and positions it well to capitalise on growth opportunities in the credit market. The improvement in asset quality metrics, combined with robust capital buffers, reflects the bank's focus on sustainable growth and risk-adjusted returns.

The CASA Challenge: Deposit Competition Intensifies

A key area of concern in the quarter was the continued pressure on the bank's current account savings account (CASA) ratio, which declined to 39.63% from 40.03% in the year-ago quarter. Whilst still amongst the highest in the public sector banking space, this 40 basis points decline reflects the intensifying competition for low-cost deposits across the banking sector. The shift in deposit mix towards higher-cost term deposits has been a contributing factor to the margin compression witnessed during the quarter.

Total deposits stood at ₹53.82 lakh crores as of March 2025, up from ₹49.16 lakh crores a year earlier, representing healthy growth of 9.48%. However, the composition of this growth has shifted towards term deposits, which command higher interest rates. This trend is consistent across the banking sector and reflects depositors' preference for locking in higher yields in the current interest rate environment. For SBI, maintaining a competitive CASA ratio whilst managing margin pressures remains a key strategic priority.

Industry Leadership: How State Bank of India Compares to Peers

State Bank of India's market position as the largest public sector bank is reflected in its substantial market capitalisation of ₹9.87 lakh crores, significantly ahead of its peers. However, this leadership position comes with a valuation premium that warrants scrutiny. Trading at a price-to-book value of 1.90x and a P/E ratio of 13.79x, SBI commands the highest multiples amongst major public sector banks, reflecting investor confidence in its franchise value and execution capabilities.

The bank's return on equity of 13.77% is competitive but not the highest in the peer group. Canara Bank leads with an ROE of 17.38%, followed by Union Bank of India at 14.57% and Indian Bank at 15.35%. SBI's ROE, whilst respectable, suggests room for improvement in capital efficiency. The bank's dividend yield of 1.44% is amongst the lowest in the peer group, with most competitors offering yields above 2%, reflecting SBI's premium valuation.

The valuation premium that SBI commands can be attributed to several factors: its unmatched distribution network, superior technology infrastructure, dominant market share in retail banking, and perceived lower execution risk compared to smaller peers. However, investors must weigh this premium against the bank's current operational metrics. With an ROE of 13.77% and margin pressures evident, the 1.90x price-to-book multiple appears stretched relative to peers trading at 1.0-1.2x book value with comparable or superior ROE profiles.

SBI's competitive advantages include its vast branch network of over 22,000 branches, strong brand recall, government backing, and leadership position in key segments such as retail deposits and MSME lending. These factors justify a premium to peers but also create expectations for consistent performance delivery. The bank's ability to maintain its leadership whilst improving profitability metrics will be crucial in justifying its current valuation.

Valuation Analysis: Premium Pricing Demands Performance Delivery

State Bank of India's current valuation metrics suggest the stock is trading at the upper end of its historical range and at a significant premium to public sector banking peers. At ₹1,066.40, the stock trades at a P/E ratio of 13.79x based on trailing twelve-month earnings, substantially higher than the peer group average of approximately 8x. The price-to-book value of 1.90x is nearly double that of most peers, reflecting the market's confidence in SBI's franchise value and growth prospects.

The stock's 52-week trading range of ₹679.65 to ₹1,090.00 indicates it is currently near its peak, just 2.17% below the 52-week high. This positioning, combined with the "Very Expensive" valuation grade assigned by the proprietary scoring system, suggests limited near-term upside potential unless the bank delivers substantial earnings growth or margin expansion. The valuation grade changed to "Very Expensive" from "Expensive" in October 2025, reflecting the stock's strong run-up over the past year.

The dividend yield of 1.44% is modest, with the latest dividend of ₹15.90 per share paid in May 2025. Whilst the absolute dividend amount is reasonable, the yield is compressed due to the elevated stock price. For income-focused investors, this yield may appear unattractive compared to peers offering 2.5-3.0% yields. The bank's dividend payout policy will be an important factor to monitor, particularly given the need to balance shareholder returns with capital retention for growth.

From a long-term perspective, SBI's valuation must be assessed against its growth trajectory and return profile. The bank has delivered impressive net profit growth of 36.98% annually over the past five years, driven by improving asset quality, scale advantages, and market share gains. However, sustaining this growth rate will be challenging given the current margin environment and competitive intensity. A fair value estimate of ₹950-1,000 appears more reasonable based on normalised earnings and peer valuations, suggesting limited upside from current levels.

Shareholding: Institutional Confidence Remains Strong

State Bank of India's shareholding pattern reflects strong institutional confidence, with total institutional holdings at 37.53% as of December 2025. The Government of India, through the President of India, maintains a 55.50% stake, unchanged over the past two quarters. This stable promoter holding provides governance continuity and strategic direction, whilst the government's commitment to the bank's growth remains evident.

Foreign institutional investors have increased their stake to 10.34% in December 2025 from 9.33% in June 2025, marking a 101 basis points increase over two quarters. This rising FII interest reflects growing international confidence in SBI's business model and India's banking sector prospects. Mutual fund holdings stood at 13.76% in December 2025, down slightly from 14.23% in September 2025, suggesting some profit-booking at elevated valuations.

Insurance companies hold 10.91% of the equity, down from 11.25% in the previous quarter, indicating some rebalancing at current price levels. The combined institutional holding of 37.53% demonstrates strong professional investor interest, though the recent marginal decline in mutual fund and insurance holdings suggests these sophisticated investors are taking profits after the stock's strong run. With 1,222 FII investors and 76 mutual fund schemes holding stakes, the stock enjoys broad-based institutional participation.

Stock Performance: Strong Long-Term Returns Mask Recent Volatility

State Bank of India's stock has delivered exceptional long-term returns, significantly outperforming both the Sensex and its sectoral peers. Over the past year, the stock has surged 41.74%, generating an alpha of 34.67 percentage points over the Sensex's 7.07% return. The three-year return stands at an impressive 95.54%, nearly 2.5 times the Sensex's 38.13% gain during the same period. Over five years, the stock has delivered returns of 171.31%, more than double the Sensex's 64.75% return.

However, recent performance has been more subdued. The stock declined 0.65% in the last trading session and is down 1.03% over the past week, underperforming the Sensex which gained 0.32% and 1.59% respectively during these periods. The one-month performance shows a gain of 4.68%, outperforming the Sensex's 1.74% decline, but the year-to-date return of 8.57% suggests momentum has moderated from the strong gains witnessed in 2025.

The stock's technical positioning remains constructive, with the overall trend classified as "Bullish" since December 5, 2025. The stock trades above all key moving averages – 5-day (₹1,060.12), 20-day (₹1,043.54), 50-day (₹1,002.23), 100-day (₹956.10), and 200-day (₹881.05) – indicating strong technical support. The MACD and Dow Theory indicators are bullish on both weekly and monthly timeframes, whilst the OBV (On-Balance Volume) suggests sustained buying interest.

The stock's beta of 0.95 classifies it as a low-beta stock, meaning it is slightly less volatile than the broader market. With a volatility of 18.46% over the past year and a positive Sharpe ratio, the stock falls into the "Low Risk High Return" category. However, given its proximity to the 52-week high of ₹1,090.00 and the "Very Expensive" valuation grade, near-term returns may be muted unless the bank delivers significant operational improvements.

Investment Thesis: Quality Franchise at Premium Valuation

State Bank of India's investment thesis rests on its dominant market position, improving asset quality, and long-term growth potential in India's underpenetrated banking sector. The bank's quality grade of "Good" reflects its strong fundamentals and consistent long-term financial performance. The proprietary Mojo score of 71 out of 100 places it in the "BUY" category, with the recommendation being that it represents a good investment opportunity, though with the caveat that valuation remains expensive.

The bank's key strengths include its market leadership position, strong lending practices evidenced by the low 1.73% gross NPA ratio, and healthy long-term growth with net profit expanding at a 36.98% annual rate over five years. High institutional holdings of 37.53% demonstrate professional investor confidence, whilst the government's 55.50% stake provides strategic stability. The bank's vast distribution network, technology investments, and brand strength create formidable competitive moats.

However, several concerns temper the bullish thesis. The primary challenge is valuation – at 1.90x book value and 13.79x earnings, the stock trades at a substantial premium to peers with comparable or superior return profiles. The Q2 FY26 results were flat, with net profit declining both sequentially and year-on-year, raising questions about near-term earnings momentum. Margin pressures are evident, with NIM compressing to 2.97% from 3.14% a year earlier, and the CASA ratio declining to 39.63%.

Key Strengths & Risk Factors

Outlook: What to Watch

The outlook for State Bank of India hinges on its ability to navigate the current margin pressure environment whilst maintaining asset quality standards. The bank's strong market position and government backing provide a solid foundation, but execution on improving return ratios and managing funding costs will be critical. The recent decline in quarterly profits, whilst driven partly by prudent provisioning, raises questions about near-term earnings momentum.

For the bank to justify its premium valuation, it must demonstrate consistent improvement in ROE towards the 15-16% range, stabilise or improve its CASA ratio, and deliver steady quarter-on-quarter profit growth. The current valuation of 1.90x book value appears to price in significant operational improvements that are yet to materialise. Until such improvements become evident, the stock's upside potential appears limited, particularly given its proximity to 52-week highs.