State Bank of India earnings quality strengthens on NIM gains and cleaner asset quality

Investment View and Recommendation

In its August 08, 2026 Q1FY27 result update, Prabhudas Lilladher retained its BUY recommendation on State Bank of India. The broker cited strong earnings quality, supported by better core revenue, improving margins and healthy asset quality. The target price was maintained at Rs 1,200.

The broker made small estimate reductions: FY27E and FY28E EPS were lowered by 0.7 per cent and 2.1 per cent, respectively, while FY28E NII was reduced by 1.0 per cent.

Q1FY27 Financial Performance

State Bank of India reported Q1FY27 net interest income of Rs 46,992 crore, up 14.4 per cent year-on-year and 2.3 per cent ahead of Prabhudas Lilladher's estimate of Rs 45,944 crore. Calculated net interest margin was 2.81 per cent, above the broker's estimate of 2.72 per cent. Reported NIM improved by 5 basis points quarter-on-quarter to 2.86 per cent.

After adjusting for the IT refund, reported NIM rose by about 10 basis points sequentially to 2.85 per cent. Core pre-provision operating profit was Rs 29,058 crore, 1.8 per cent above the broker's estimate and 21.6 per cent higher year-on-year. Core profit after tax was Rs 17,805 crore, broadly in line with the estimate, while reported PAT was Rs 21,121 crore.

Margins, Funding and Balance-Sheet Liquidity

The margin improvement reflected lower dependence on bulk deposits, soft quarter-on-quarter corporate-loan growth and healthy accretion across retail, agriculture and MSME segments. Loan growth was 19.0 per cent year-on-year and deposit growth was 9.7 per cent, although both were below the broker's expectations.

The loan-to-deposit ratio increased to 83.1 per cent from 81.6 per cent in Q4FY26, while the CASA ratio remained stable at 37.6 per cent. The liquidity coverage ratio was 126 per cent, and excess SLR liquidity of about Rs 3.6 lakh crore provides scope to deploy liquidity towards growth.

Management maintained its FY27 NIM guidance of 3 per cent. State Bank of India mobilised about US$6 billion of FCNR deposits and is targeting US$10 billion, which management expects could support deposit growth in Q2FY27. Management indicated that FCNR-based leverage should not materially affect NIM because it would replace trade-finance assets with similar yields.

Credit Growth and Business Segment Trends

Management raised FY27 credit-growth guidance to 14-16 per cent from 13-15 per cent previously, targeting growth 2-3 per cent above nominal GDP. Q1FY27 advances increased 2.3 per cent sequentially, led by MSME, agriculture and retail growth of 5.5 per cent, 4.7 per cent and 2.2 per cent, respectively.

Corporate growth was subdued because the shift from T-bill to MCLR increased pricing. However, management cited a corporate pipeline of about Rs 9 lakh crore and traction in mergers and acquisitions. MSME loans reached Rs 6.5 lakh crore after growing 22.3 per cent year-on-year. State Bank of India also expanded its automated loan-approval platform to larger MSME loan amounts to reduce turnaround time.

Xpress Credit demand remained healthy, although growth was below double digits because borrowers preferred lower-cost gold loans and the bank has limited exposure to self-employed borrowers. The bank is establishing a collections vertical with about 6,000 staff to support expansion in this segment.

Gold loans grew 18.6 per cent sequentially. Personal and agriculture gold loans stood at Rs 1.25 lakh crore and Rs 1.85 lakh crore, respectively. Yields were 8.5-8.9 per cent and loan-to-value was about 56 per cent.

Asset Quality and Provisions

Asset quality improved, with gross NPA at 1.47 per cent and net NPA at 0.38 per cent. Gross slippages of Rs 7,359 crore were lower than Prabhudas Lilladher's estimate, while recoveries of Rs 3,574 crore exceeded expectations.

Management described Q1 slippages as seasonal and said Rs 1,500 crore was subsequently pulled back. Provisions of Rs 5,047 crore were above the broker's estimate, partly because of amortisation of incentive provisions of about Rs 3,000 crore for FY27.

The impact of expected credit loss norms remains under assessment. Management expects the impact not to be material because of capital accretion from subsidiary divestments and regulatory transition dispensation.

Valuation and Investment Thesis

Prabhudas Lilladher values State Bank of India's standalone bank at 1.4 times March 2028 core adjusted book value. Its sum-of-the-parts valuation includes Rs 257 per share of subsidiary and investment value, including SBI Life, SBI Mutual Fund, SBI Cards, SBI Caps, SBI General Insurance, Yes Bank and UTI AMC. This is followed by a holding-company discount of Rs 45 per share.

The key investment thesis is based on sustained earnings quality, margin resilience, lower net slippages and the balance sheet's capacity to support credit growth.

Key Monitorable Factors

• Slower wholesale-loan and deposit growth.
• Higher provisions, including the impact of incentive-provision amortisation.
• The ultimate impact of expected credit loss norms.
• The ability to sustain NIM near management's 3 per cent FY27 guidance.