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SBI: Good show in troubled times - Views on News from Equitymaster

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SBI: Good show in troubled times
Jan 24, 2009

Performance summary
  • Interest income grows by 34% YoY in 9mFY09, despite lowering of prime lending rates
  • Other income grows by 36% YoY in 9mFY09 reaping benefits of drop in interest rates in the SLR portfolio.
  • Provisions drop by 76% in 3QFY09 due to write back of investment provisions; provisions for wage revision and pension fund reflect in 9mFY09 figures.
  • Cost to income ratio drops to 47% in 9mFY09 from 52% in 9mFY08.
  • Capital adequacy ratio at 13.7% at the end of 9mFY09; net NPAs at 1.3% (1.4% in 9mFY08).
  • During 3QFY09, SBI has signed a JV with Insurance Australia Group (IAG) for undertaking general insurance business (74% stake). Another with Macquarie Capital and IFC for US$ 3 bn infrastructure fund.
  • First installment of Rs 22 bn for reimbursement of farm loan waiver received from government in 3QFY09.


Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest Income 126,668 180,303 42.3% 353,735 473,960 34.0%
Interest Expense 84,104 122,721 45.9% 231,529 313,648 35.5%
Net Interest Income 42,564 57,582 35.3% 122,206 160,312 31.2%
NIM (%)       3.0% 3.2%  
Other Income 26,972 32,256 19.6% 58,777 79,725 35.6%
Other Expense 32,935 45,011 36.7% 93,632 113,655 21.4%
Provisions and contingencies 8,044 1,968 -75.5% 10,495 23,569 124.6%
Profit before tax 28,557 42,859 50.1% 76,856 102,813 33.8%
Tax 10,469 18,074 72.6% 28,397 39,023 37.4%
Profit after tax/ (loss) 18,088 24,785 37.0% 48,459 63,790 31.6%
Net profit margin (%)       13.7% 13.5%  
No. of shares (m)       526.3 634.8  
Book value per share (Rs)*         772.5  
P/BV (x)         1.3  
* (Book value as on 31st December 2008)

What has driven performance in 3QFY09?
  • If there was any India bank that benefited from the turmoil in the financial markets over the past few months, it was SBI. The bank’s reputation of being a representative of the government in the banking sector helped it collect all the savings and current accounts that were on the lookout for ‘safety’; having lost confidence in foreign and private sector banks. Despite a higher growth in term deposits as compared to the low cost ones (CASA), SBI increased its market share in deposits by over 2% in the past 12 months (17.5% in 9mFY09), bringing it closer to FY03 levels. Its share in advances (16.1% in 9mFY09) also increased by 0.6%. The overall growth in advances was lower than in deposits, particularly due to lower disbursements to retail and agri-credit segments. While SBI’s advance growth has been marginally higher than our estimates, its net interest margins (which improved from 3.0% in 9mFY08 to 3.2% in 9mFY09) are well in line with our estimates for full year FY09.

    Balancing act…
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 3,960,140   5,102,790   28.9%
    Agriculture 403,934 10.2% 508,957 10.0% 26.0%
    Retail 851,430 21.5% 1,081,316 21.2% 27.0%
    SME 1,013,796 25.6% 1,297,659 25.4% 28.0%
    Large corporates 1,690,980 42.7% 2,485,740 48.7% 47.0%
    Deposits 5,101,320   6,929,210   35.8%
    CASA 1,957,960 39.5% 2,373,070 39.7% 21.2%
    Term deposits 3,143,360 61.6% 4,556,140 65.8% 44.9%
    Credit/Deposit 77.6%   73.6%    

  • The bank’s fee income showed a healthy growth of 57% YoY, bringing the fee to total income ratio to 6.7% in 9mFY09 from 5.7% in 9mFY08. The growth in other income this quarter was largely backed by gains in the investment portfolio.

  • Although the natural attrition has led to a sharp decline in the cost to income ratio of the bank from 52% in 9mFY08 to 47% in 9mFY09, the bank will be recruiting 25,000 new employees over the next few quarters, which may push up this ratio to the earlier levels.

  • SBI did not feel the heat on its NPAs in the previous quarter with net NPAs falling to 1.3% of advances from 1.4% in 3QFY08. However, the bank does foresee some delinquency risks in its small corporate and retail loan books going forward. The provision coverage ratio stood at 48.5% at the end of 9mFY09.

  • The total amount receivable from the government on account of agricultural debt waiver is Rs 55 bn and on account of debt relief is Rs 3.2 bn. Of this, the first installment of Rs 22 bn for reimbursement of loan waiver was received from government in 3QFY09. In respect of debt relief, the bank has made provision of Rs 1.4 bn towards loss of interest on amount receivable from eligible farmers, which is reversible to the General Reserve upon complete settling of the account after receipt of claim from the government. Further, the bank has retained prudential provision of Rs 4 bn on non performing agricultural advances, which have been rendered surplus on settlement of dues.

What to expect?
At the current price of Rs 1,042, the stock is trading at 0.9 times our estimated FY11 standalone adjusted book value. SBI’s balance sheet growth continues to remain ahead of the industry due to its widespread rural and semi-urban presence. The bank has also maintained reasonable provisioning for possible slippages, both in the agricultural and retail portfolio. Although 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.

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