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SBI: Provisions dent profits
Jan 25, 2010

Performance summary
  • Interest income grows by 14% YoY in 9mFY10, 4% YoY in 3QFY10
  • Provisions triple for the third quarter as the bank provides for incremental slippage and complies with RBI’s provisioning mandate.
  • Cost to income ratio increases from 47% in 9mFY09 to 52% in 9mFY10 on the back of additional hiring.
  • Gross and net NPAs rise to 3.1% and 1.9% from 2.5% and 1.4% of advances respectively in 9mFY09.
  • Capital adequacy ratio at 13.8% (as per Basel II) at the end of 9mFY10.
  • Board declares an interim dividend of Rs 10 per share.



Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest Income 170,803 177,796 4.1% 464,460 530,283 14.2%
Interest Expense 113,221 114,634 1.2% 304,148 360,783 18.6%
Net Interest Income 57,582 63,162 9.7% 160,312 169,500 5.7%
NIM (%)       3.2% 2.6%  
Other Income 32,256 33,657 4.3% 79,725 104,596 31.2%
Other Expense 45,011 50,638 12.5% 113,656 142,826 25.7%
Provisions and contingencies 1,968 8,566 335.3% 23,569 20,454 -13.2%
Profit before tax 42,859 37,615 -12.2% 102,812 110,816 7.8%
Tax 18,073 12,825 -29.0% 39,023 37,822 -3.1%
Profit after tax/ (loss) 24,786 24,790 0.0% 63,789 72,994 14.4%
Net profit margin (%)       12.0% 13.8%  
No. of shares (m)       634.8 634.8  
Book value per share (Rs)*         912.7  
P/BV (x)         2.3  
* (Book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • Having leveraged on its strength in low cost deposits (CASA) at a time when most banks are grappling with higher interest rates, the excess liquidity seems to have been a bane of contention for India’s largest bank this quarter. SBI made an appreciable effort to increase its market share in both deposits (16.1% in 9mFY10) and advances (16.9% in 9mFY10). The bank tapped its relationships with large corporates as well as retail customers, to grow its deposit base. However, not all of it could be deployed profitably. As a result, the bank witnessed nearly 60 basis points (0.6%) drop in net interest margins. In the retail segment, home loans (comprising over 29% of the bank’s retail advance book) grew by 30% YoY, auto loans by 32% and personal loans by 31% YoY in the last 9 months. In home loans, the bank has an average ticket size of Rs 1.0 m, making the most of its priority sector lending. Also, 98% of the home loan borrowers were first time buyers.

    Balancing act…
    (Rs m) 9mFY09 % of total 9mFY10 % of total Change
    Advances 5,095,730   6,071,540   19.1%
    Agriculture 523,150 10.3% 611,580 10.1% 16.9%
    International 727,250 14.3% 937,190 15.4% 28.9%
    Retail 1,325,170 26.0% 1,547,720 25.5% 16.8%
    SME 881,360 17.3% 1,029,380 17.0% 16.8%
    Large corporates 1,638,800 32.2% 1,945,670 32.0% 18.7%
    Deposits 6,487,830   7,180,900   10.7%
    CASA 2,373,248 36.6% 3,083,478 42.9% 29.9%
    Term deposits 4,114,582 63.4% 4,097,422 57.1% -0.4%
    Credit/Deposit 78.5%   84.6%    

    While the bank’s advance growth has been higher than our estimates, its net interest margins are well in line with our estimates for full year FY10.

  • The bank’s fee income showed a healthy growth of 46% YoY, bringing the fee to total income ratio to 22.5% in 9mFY10 from 17.6% in 9mFY09.

  • The natural attrition has led to a sharp decline in the cost to income ratio of the bank from 55% in 1HFY08 to 46% in 1HFY09. However, as the bank will be recruiting 25,000 new employees in 2HFY09, we see this ratio going up marginally in the near future.

  • SBI did feel the heat on its NPAs in the past 12 months with net NPAs rising to 1.9% of advances from 1.4% in 9mFY09. Also, the bank does foresee some delinquency risks in its SME and retail loan books going forward. The provision coverage ratio stood at around 50% in 9mFY09 and the bank needs to bring it up to 70% by 1HFY11. SBI also revealed that of its Rs 168 bn of restructured assets about 6% have turned into NPAs so far and it expects about 10% of the restructured assets to become incremental NPAs.

  • Being the bank with the largest franchise, SBI has been receiving Rs 50 bn of low-cost savings deposits per month in FY10. The increase in low-cost savings deposits brought excess liquidity to the bank’s books and this cost it as much. The carrying cost for this was about Rs 2 bn while the opportunity cost was about Rs 6 bn. SBI believes that even if RBI increases CRR (cash reserve ratio) by 0.5% in its monetary policy review, its liquidity will reduce by Rs 60 bn, hardly impacting its average liquidity of Rs 750 bn. In this situation, the bank does not see its lending rates increasing in the next six months.

What to expect?
At the current price of Rs 2,093, the stock is trading at 1.5 times our estimated FY12 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. 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. Having said that most of the medium term upsides seem to be already priced in.

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