Is SBI's rip-roaring rally finally coming to an end?

Banking giant State Bank of India (SBI) has been spry for its age. Its stock has quadrupled in the last four years as the net profit leaped 43 per cent per annum—an awe-inspiring feat for a large business whose profit belly of Rs 60,000 crore exceeds annual state budgets of Goa and Sikkim combined.

The banking behemoth is now targeting a profit of Rs 1 lakh crore in the next three to five years, its newly-elected Chairman C S Setty said in a media interaction recently. If achieved, this will make SBI only second to Reliance Industries to ever cross the big profit mark. But the milestone is not really a milestone. While it is easily achievable and historic, it only reveals that even spry leaders age and wrinkle. Here's why:

1. Past may not be prologue. The Rs 1 lakh crore-mark means a yearly net profit growth of just 10-13 per cent in the next four to five years. Not as cool as it sounded before, right? Especially when you compare the record of the last four years. The past profit run has been a result of writing back or restoring large provisions to profitability, as its net non-performing assets or net NPAs eased from a painful 6 per cent in FY18 to under 0.57 per cent in FY24. It's basically the low base effect that propped up SBI's financials in the recent past.

2. Touching peaks. SBI's return ratios are at their peak as evidenced from its return on assets or ROA of 1.36 per cent, the highest in the last 30 years. Sustaining these levels is going to be tough.

3. NIM squeeze is here to stay. Add net interest margin pressures to the mix, which will also restrain fast growth. SBI's advances grew 15 per cent in FY24, while deposits grew only 11 per cent. The trend is likely to continue and the competition for deposits is expected to remain firm. This will keep industry NIMs, including that of SBI, muted especially as forthcoming rate cuts force the bank's hands to lower lending rates.

Investors' corner

SBI will remain the fundamentally strong giant that it is today, but only a bit sleepier. Investors will be better off tempering hopes that the fast growth in recent years will be mirrored ahead. Those seeking high returns may also be disappointed loading up the stock at current levels. It is trading at a P/B ratio of 1.72 times, above the five-year median P/B of 1.51 times.

Disclaimer: This is not a stock recommendation. Investors should do their own due diligence before making any investment decision.

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