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SBI: Provisioning plays spoilsport!
Jan 24, 2007

Performance summary:
India’s largest banking entity, SBI, announced lacklustre results for the third quarter and nine-months ended December 2006. While the bank recorded a strong 27% YoY growth in its advances, the deposits could not match the pace, and grew at a much lower rate of 11% YoY in the trailing 12 month period. Also, net interest margins were under pressure, as they contracted by 20 basis points during 9mFY07. The third quarter bottomline was impacted by lower net interest income and a substantial rise in provisioning.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Income from operations 95,582 97,359 1.9% 272,859 279,496 2.4%
Other Income 18,405 18,110 -1.6% 47,117 50,074 6.3%
Interest Expense 53,383 57,846 8.4% 152,048 162,155 6.6%
Net Interest Income 42,199 39,513 -6.4% 120,811 117,341 -2.9%
NIM (%)       3.5% 3.3%  
Other Expense 34,607 29,074 -16.0% 87,707 85,775 -2.2%
Provisions and contingencies 4,698 11,662 148.2% 30,539 31,295 2.5%
Profit before tax 21,298 16,888 -20.7% 49,681 50,345 1.3%
Tax 10,147 6,237   14,147 19,864 40.4%
Profit after tax/ (loss) 11,152 10,650 -4.5% 35,534 30,481 -14.2%
Net profit margin (%) 11.5% 11.1%   12.7% 11.2%  
No. of shares (m)       526.3 526.3  
Diluted earnings per share (Rs)*         74.1  
P/E (x)         14.8  
* (12 months trailing)

The country’s largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 4 trillion (Rs 4,000 bn). Although the bank's loan book is largely skewed towards corporate (74% of total advances), the retail side is also fast catching up. The bank has been a major beneficiary of the current upturn in investment cycle and has continued to witness substantial growth in both retail and corporate segments. It is also an active trader in forex and is the leader in cash management services. SBI has a network of over 9,350 branches and 5,800 ATMs across the country.

What has driven performance in 3QFY07?
Asset growth momentum continues: The benefits of an extended franchise continue to accrue to SBI, as seen by the strong 27% YoY growth in the bank’s advances in the trailing 12-month period to December 2006. In fact, the bank lent 26% more funds in 9mFY07 than what it had done in the corresponding period of FY06. As at the end of December 2006, the bank’s domestic advances grew by 29% YoY. This was, however, largely due to a strong growth in advances recorded during the quarter ended March 2006, as in the first nine months of the fiscal, the domestic advance growth stood at a much lower 17% YoY. SBI’s retail book (26% of total advances) led the growth at 26% YoY. Home loans (grew 20% YoY during the 12 month period ended December 2006) comprising over 52% of the bank’s retail advance book, constituted one-third of the incremental retail off take in the first nine-month of this fiscal. The bank’s well-penetrated franchise also helped it grow the agricultural advances at 23% YoY during 9mFY07.

As compared to the bank’s performance on the advances front, the deposit growth was muted. As at the end of December 2006, SBI’s deposits grew by 11% YoY. The cost of deposits, excluding IMDs (India Millennium Deposits) marginally increased from 4.52% in December 2005 to 4.57% in December 2006. This was despite the bank’s successive increases in deposit rates in 2006. However, including the IMDs, the cost of deposits declined from 4.79% in 9mFY06 to 4.57% in 9mFY07. Cost of deposits increase was somewhat contained by the bank as its CASA (current account savings account) ratio improved from 40.9% as at the end of December 2005 to 43.3% in December 2006. While the net interest margins have declined by 20 basis points over that of 9mFY06, the same removing the effect of the IMDs and a one-off item have expanded by 40 basis points (2.9% in 9mFY06). We have estimated NIMs at 3.1% in FY07E.

Retail led asset growth…
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Advances 2,485,980   3,153,760   26.9%
Retail 614,783 24.7% 812,409 25.8% 32.1%
Corporate 1,871,197 75.3% 2,341,351 74.2% 25.1%
Deposits 3,637,310   4,043,520   11.2%
CASA 1,485,841 40.9% 1,750,440 43.3% 17.8%
Credit/Deposit 68.3%   78.0%    

Other income – IMD effect: SBI’s other income declined by 2% YoY during 3QFY07. This was mainly due to a higher base effect on account of the bank booking Rs 5.3 bn of exchange profit on redemption of the IMDs in 3QFY06. Excluding this one time income, the other income component has grown by over 38% YoY during the quarter, thus leading to a net profit growth of 83% YoY for SBI.

Costs – Lower employee cost benefit: SBI’s staff costs registered a contraction of nearly 7% (as percentage of sales) during 3QFY07. Consequently, the cost to income ratio declined from 57.1% in 3QFY06 to 50.5% in 3QFY07. We expect the same to reduce further going forward as 38,000 employees retire from the bank’s payrolls by 2010.

NPAs - No surprises: SBI reported no negative surprises on the NPAs side with both gross and net NPAs reducing to 3.3% and 1.5% of advances respectively in 3QFY07, from 4.4% and 1.7% respectively in 3QFY06.

What to expect?
At the current price of Rs 1,174, the stock is trading 1.7 times our estimated FY09 adjusted book value. While we anticipate lower growth and muted margins in the near term, the bank, given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term. Its inorganic growth initiatives in the overseas markets are also likely to aid the overall business prospects going forward.

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