This PSU Bank Is On A Roll

Credit growing at 17%, GNPA at a multi-decadal low, RoA held at 1.1% despite margin headwinds, and capital ratios restored

India’s largest bank does not need to be flashy to be compelling. State Bank of India’s FY26 performance was exactly what long-term investors in the franchise have been waiting for — broad-based credit growth, asset quality at its best in a generation, disciplined liability management, and a return on assets that held firm despite a year of margin pressure.

A Year of Exceptional Delivery

FY26 was, in Axis Securities’ framing, a year of successfully balancing growth and profitability despite genuine headwinds. Credit growth came in at 17.2% year-on-year — broad-based across both retail and corporate segments.

The corporate book, which has historically been the source of SBI’s asset quality problems, saw GNPA decline sharply to 0.88% from 1.49% in FY25 — “the most significant year-on-year improvement in any segment,” the report notes. Overall GNPA fell to 1.49% and NNPA to 0.39% — both multi-decadal lows. Credit costs stayed benign at 39 basis points, flat year-on-year, while provision coverage remained healthy at approximately 75%.

The margin environment was difficult — NIM pressure was visible through the year in a declining interest rate environment, with domestic NIMs held at 3% despite rate cuts. NII growth was consequently subdued at 4% year-on-year. But SBI compensated through a different route: non-interest income grew 18% year-on-year, supported by robust core fee income, increasing cross-sell income and a one-time gain of Rs 45.9 billion from the sale of its stake in Yes Bank. The result was RoA of 1.1% — held flat year-on-year — which in the context of the margin environment is a meaningful achievement.

The Asset Quality 

For much of the last decade, SBI’s asset quality was the central risk that kept a valuation discount embedded in the stock. The NPA cycle of the mid-2010s, the subsequent clean-up, and the long journey back to health has been one of Indian banking’s defining narratives. FY26’s numbers represent the clearest evidence yet that the clean-up is complete and the franchise is operating from a position of genuine credit strength.

GNPA at 1.49% — a multi-decadal low. NNPA at 0.39%. Corporate GNPA at 0.88%. Slippages moderated and well-controlled, with seasonal agri stress rather than structural deterioration. “Asset quality metrics continue to remain at multi-decadal lows, with limited stress visibility in both domestic and overseas portfolios,” Axis Securities states — adding that the ECL transition, a concern for the broader banking sector, is also expected to remain non-disruptive for SBI.

Credit Growth 

Beyond the headline credit growth of 17%, what is strategically interesting is where SBI is directing incremental lending. The bank is actively building exposure to renewables, data centres and semiconductors — the emerging sectors of the Indian economy where credit demand is accelerating and where SBI’s balance sheet scale gives it a genuine competitive advantage over smaller lenders. Priority sector lending improved to 24% of net advances from 22% year-on-year, driven by strong agri and SME growth — segments that also diversify the asset base away from concentration risks.

The liability franchise is being simultaneously strengthened. Deposit growth of 11% year-on-year lagged credit growth — a gap that Axis Securities flags as a monitoring point — but the composition is healthy, with the franchise remaining dominated by retail deposits and a CASA ratio of 37.9% maintained. The bank also raised Rs 250 billion via QIP in FY26, driving capital ratio improvement — CRAR strengthened to 15.4% from 14.3%, and Tier-1 capital improved to 13.3%. SBI enters FY27 with a restored capital buffer that removes near-term equity dilution risk.

Digital Transformation Levers

Axis Securities’ note flags two less-discussed but important drivers of the medium-term earnings case. First, digital transformation is accelerating — improving operational efficiency and enabling deeper customer penetration at lower marginal cost. The cost-to-income ratio of 50.1% in FY26 (aided by the Yes Bank stake sale gain) reflects the productivity gains being achieved. Second, cross-selling intensity is increasing — fee income growth and non-interest income performance in FY26 are early evidence of a franchise that is monetising its 500-million customer base more effectively than it has historically.

Scorecard

The valuation at 1.1x FY28E adjusted book value is where the opportunity becomes most apparent. SBI is trading at a significant discount to private sector peers — reflecting the PSU discount, the historically justified concern about asset quality, and the RoA gap versus best-in-class private banks. But with asset quality now at multi-decadal lows, RoA sustainably above 1%, and credit growth broad-based and accelerating into high-growth sectors, Axis Securities believes current valuations are “reasonable” — and that 28% upside to target is the market’s eventual recognition of a bank that has fundamentally transformed its credit culture.