State Bank of India stock downgraded by Axis Capital on NIM pressure

Axis Capital downgraded State Bank of India (SBI) to Add from Buy, lowering the price target to INR860 from INR1,055, citing anticipated net interest margin (NIM) pressure and a projected 12 basis points year-over-year decline in fiscal year 2026 due to lower asset yields. The firm expects SBI's core return on assets to moderate below 1% in FY26, though its strong retail franchise and potential capital raise could accelerate recovery in FY27. While acknowledging SBI's leading position among public sector banks with healthy return on equity of 14-15%, Axis Capital suggests near-term return on assets moderation could limit valuation upside.

Analysis

Axis Capital has revised its rating for State Bank of India (SBI) to 'Add' from 'Buy', concurrently reducing its price target from INR1,055 to INR860. This adjustment is primarily driven by analyst Jayant Kharote's expectation of near-term pressure on net interest margins (NIM), with a projected 12 basis points year-over-year decline in fiscal year 2026 attributed to lower asset yields. Consequently, SBI's core return on assets (RoA) is anticipated to moderate to below 1% in FY26. However, Axis Capital also points to mitigating factors such as SBI's robust liability franchise, the potential benefits from a CRR release, and a possible capital-raise, which could collectively spur a recovery in FY27. Despite the downgrade, the research note underscores SBI's "formidable retail franchise in both assets and liabilities" and "best-in-class" asset quality, which positions its growth and profitability outlook more favorably compared to other public sector banks. While SBI is expected to sustain a healthy return on equity (RoE) of approximately 14-15%, the anticipated near-term moderation in RoA is seen as a potential constraint on its valuation, currently around a 1x core price-to-book ratio, thereby limiting immediate upside potential.

Key Decisions for Investors

• Acknowledge the downgrade to 'Add' and the reduced price target of INR860 for State Bank of India, reflecting Axis Capital's expectation of near-term net interest margin pressure and moderated return on assets.
• Closely monitor SBI's upcoming financial reports for evidence of the projected 12 basis points NIM decline in FY26 and RoA falling below 1%, as these are key drivers for the revised outlook.
• Balance the near-term concerns against SBI's recognized strengths, such as its formidable retail franchise, best-in-class asset quality, and potential for recovery in FY27, when assessing investment horizons.
• Factor in the potential for limited near-term valuation upside, with SBI trading around a 1x core price-to-book ratio, due to the anticipated RoA moderation, despite a healthy projected RoE of 14-15%.