IIFL Securities has articulated a preference for State Bank of India (SBI) over Bank of Baroda (BOB), driven by expectations of a reversal in recent profitability trends. Despite BOB’s higher average Return on Assets (ROA) over the past three years, the brokerage expects this to change due to inferior margin trajectory and rising credit costs for BOB.
In its comprehensive analysis, IIFL Securities notes that BOB’s valuation remains at a 25 per cent discount compared to SBI, a trend consistent with the 10-year average. However, the gap is expected to persist, with BOB forecasted to deliver 6 per cent and 17 per cent lower average ROA and Return on Equity (ROE), respectively. “We expect BOB to deliver 6 per cent/17 per cent lower avg. ROA/ROE,” IIFL Securities stated.
SBI’s strategic initiatives in FY25 have included the introduction of customised home loan products, new education loan schemes, and a strong focus on renewable energy projects. Furthermore, SBI has maintained a significant market share in government business by enhancing its transaction banking and trade finance verticals.
Conversely, BOB has focused on expanding its customer base, evidenced by the opening of 0.9 million new CASA accounts and the addition of 1,800 clients to its CMS platform. “BOB opened 0.9 mn new CASA accounts, added 1,800 new clients on its CMS platform and opened 359 specialised MSME branches in FY25,” IIFL Securities noted.
SBI continues to strengthen its digital presence with a faster-growing app user base for SBI YONO compared to BOB World. SBI is also preparing to launch YONO 2.0 in FY26. Despite BOB’s efforts in digital development, it ranks fourth among PSU banks on the EASE 7.0 index, as opposed to SBI’s first-place ranking. “still ranks 4 th amongst PSU banks on the EASE 7.0 index vs. 1st for SBI,” IIFL Securities reported.
In terms of asset quality, SBI has outperformed BOB, with lower slippages and superior Non-Performing Assets (NPA) metrics across most segments. Both banks maintain a similar Provision Coverage Ratio (PCR) for NPAs, but SBI’s total stressed loans enjoy a higher PCR.
BOB’s net interest margin (NIM) performance has been under pressure, with a 30 basis points decline compared to a slight increase for SBI in the latest cycle. Recent rate cuts are expected to exert further margin pressure on BOB due to its higher share of repo-linked loans.
Looking at deposit mobilisation, BOB has outpaced SBI across most categories, except current accounts. However, over a five-year period, both banks have seen a reduction in market share.
Despite having a larger distribution network, SBI’s expansion efforts were more pronounced, with 395 new branches and over 3,900 employees added, contrasting with BOB’s 90 new branches and a reduction in workforce.
Loan growth at BOB has surpassed SBI’s in most segments, except SME. However, SBI’s infrastructure loan growth outpaced BOB, which witnessed a decline.
SBI’s fee income and productivity metrics have shown improvement, while BOB excels in cost efficiency. Nevertheless, SBI’s branch and employee productivity remain higher.
New initiatives by SBI, including customised loans and a focus on renewable energy and education, are expected to bolster its market position. BOB’s efforts in client expansion and MSME branches highlight its focus on core banking segments.
IIFL Securities’ analysis suggests that the valuation gap between the two banks is unlikely to narrow, with BOB projected to continue delivering lower profitability metrics compared to SBI. This assessment underpins the brokerage’s investment ratings—’BUY’ for SBI and ‘ADD’ for BOB.
The brokerage suggested a target price of Rs 930 for SBI and Rs 270 for BOB.
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