SBI: Is the elephant dancing on a tin can?

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26 Aug, 2025 12:21

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State Bank of India has never had it better when it comes to investor love. The stock has zoomed 15 percent in three months, outpacing the broad market and leaving its peers far behind.

This is not irrational exuberance – it is an acknowledgement of the country’s largest lender finally shaking off the shackles of bad loans and going full throttle on lending.

With growth comes the need for capital to fund it and this is the next stage that analysts say will be critical for another rerating of the SBI stock.

SBI has a ‘buy’ rating from almost all brokerages, with most of them having rerated it in the past two years. Despite the scorching gains so far, the shares trade at a modest 1.5 times the one-year forward book value.

“For SBI, most of the positives have been priced in but there is still a lot of upside for the stock,” said Gaurav Jani, an analyst at Prabhudas Lilladher.
That brings us back to the factor that will determine how fast SBI can hold on to its valuation gains and surge even further ahead.

Drop some money
SBI’s capital adequacy ratio was 13.51 percent in September, higher than the regulatory requirement of 12 percent and marginally above 13.35 percent a year ago.

Note that during this time, the lender’s toxic loan book dropped sharply, lowering its provisioning needs. It also raised capital from the bond market.
SBI’s quarterly profits have risen consistently. Still, the rather modest increase in its capital ratio shows credit growth has burned through most internal accruals.

What’s more, chairman Dinesh Khara expects this loan growth momentum to continue, depending on the strength of the economy’s expansion. He has pencilled in loan expansion of as much as 16 percent for FY23.

Long story short, SBI needs to raise capital and analysts at JM Financial gauge that the money should come over the next 1-2 years.

The capital must be Tier-1 because the bank’s Common Equity Tier-1 capital ratio is at 9.53 percent, against a minimum requirement of 8.6 percent.

“While SBI may need to raise equity capital over the next 12-24 months (CET1 at 9.5%), stake sale in subsidiaries (SBI Funds, SBI General Insurance) remains another option to augment capital and may delay the eventual dilution,” JM Financial analysts said.

But Khara poured hot water over the prospects of a stake sale by saying recently that the listing of SBI Mutual Fund is now on the backburner. There is no clarity on whether the general insurance arm will go public.

Mind the deposit gap
SBI’s deposit growth (10 percent) was just half of its loan growth (20 percent) for the September quarter. This should worry the bank on its liquidity position and its ability to lend with the same gusto that it does now.

If the 10 percentage point gap between credit and deposit growth persists, it could significantly crimp the bank’s ability to lend.

Granted, the bank’s deposit franchise is unparalleled and its ‘Safe bank of India’ tag will ensure a steady inflow. But the question is whether this is enough.

What helps SBI on liquidity is its practice of keeping a big buffer through liquid assets such as government bonds. Its liquidity coverage ratio at 132.6 percent instils confidence. Even so, the wide wedge between deposit and loan growth underscores the need for growth capital.

The prospects of the country’s largest bank are bright in the capital market and analysts see valuations only improving from here on. The comparatively modest multiples only make SBI a more appealing stock to buy.

Since some of this is also due to an uncertainty premium that sticks to large and safe businesses, SBI needs to sustain its growth and profitability momentum.

A capital boost ensures this or else the elephant is dancing but on a tin can!