India’s largest lender, State Bank of India (SBI), continues to grapple with narrowing margins as the rising cost of deposits takes a toll.
Investors who hoped for stabilisation in SBI’s net interest margin (NIM) in the December quarter (Q3FY25) have been disappointed. The bank’s NIM fell 21 bps year-on-year (YoY) and 13 bps quarter-on-quarter (QoQ) to 3.01% on a standalone basis.
It essentially reflects the pressure on deposit costs. Term deposits were up 13.5% YoY to ₹30.5 trillion, but CASA was up by only 4.5% as customers shifted saving account balances to fixed deposits to take advantage of higher interest rates.
Rate cut impact
The bank’s endeavour is to maintain NIM at 3% on a sustainable basis. The Reserve Bank of India has cut the repo rate by 25 bps on Friday. At SBI’s Q3 analysts meet held on Thursday, there were queries posed on the impact of potential rate cuts on SBI’s NIM. The management expects a 25 bps cut in repo rate to cause a fall of just 3 bps in their NIM as repo rate linked loans stand at 28% of SBI’s loan portfolio.
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Though core fee income showed a healthy growth of 16% YoY to ₹7,267 crore, its contribution to core net income i.e. net interest income and fee income remains low at 15%. Excluding the provision for employee costs, core pre-provisioning operating profit (PPoP) fell 5% YoY to ₹23,449 crore.
Advance and deposit growth for the bank stood at 13.5% and 9.8% y-o-y. The bank is not concerned about the gap between advance growth rate and deposit growth rate as it is comfortably placed in terms of credit-deposit ratio at 78% at Q3-end.
Big bet on capex lending
SBI’s management highlighted a strong pipeline of corporate loan approvals worth ₹4.8 trillion, with the majority earmarked for fresh capital expenditure. This is a crucial macroeconomic development, addressing concerns over sluggish capex growth. Notably, the bank is maintaining a disciplined approach, avoiding aggressive lending or deposit mobilisation at unfavourable rates.
The most reassuring aspect of the results is that asset quality continues to be robust. While fresh slippages declined both QoQ and YoY, SBI’s credit cost remained low at 0.24%, with the management attributing it to a favourable credit cycle. Looking ahead, they expressed confidence in maintaining credit costs below 0.5% across cycles.
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SBI’s unsecured personal loan portfolio, branded as Xpress Credit, has not posed any unexpected NPA shocks, accounting for less than 10% of total loans. While the segment appears to have the highest GNPA ratio, this is largely due to a denominator effect, as the bank temporarily slowed lending to focus on system upgrades.
In fact, the bank plans to grow unsecured loans in double digits now at a time when its competitors are looking to go slow on the category. Microfinance loans, which have been a problem for the banking system as a whole, is also not a big concern for the bank as the loan book size is small at ₹12,000 crore.
As far as capital raising plan is concerned, the bank maintained that they will continue to have accretion to their equity part of capital adequacy ratio (common equity tier 1 or CET 1) as long as return on equity (RoE) exceeds credit growth rate. Consequently, there is no pressing need to raise capital. The bank’s target is to maintain sustainable RoE of 15%.
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Given the lack of positive surprises, the Street greeted SBI’s Q3FY25 results with subdued reaction. The stock fell more than 1% in early trade on Friday, taking the loss so far in 2025 to around 6%. With deposit pressure easing out in the banking system, there is renewed interest in private banks that could limit gains in SBI stock in the near future.
