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SBI: The elephant dances again!

Jan 28, 2005

Performance Summary
State Bank of India (SBI), the banking sector behemoth, has reported a 20% YoY growth in its bottomline on the back of an 8% YoY rise (decent considering the advances base) in topline for the December quarter. SBI's strong bottomline performance for 3QFY05 has primarily been on account of improvement in its operating margins and strong growth in other income. The bank has also significantly increased its provisioning in the December quarter, which led to some curtailment in the bottomline growth.

Rs (m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Income from operations 74374 80,290 8.0% 228,216 237,804 4.2%
Other Income 11,219 22,380 99.5% 55,299 54,293 -1.8%
Interest Expense 46,644 43,690 -6.3% 149,489 137,865 -7.8%
Net Interest Income 27,730 36,600 32.0% 78,727 99,939 26.9%
Other Expense 20,946 25,081 19.7% 62,145 73,569 18.4%
Operating profit / (loss) 6,784 11,519 69.8% 16,582 26,370 59.0%
Operating profit margin (%) 9.1% 14.3% 7.3% 11.1%
Provisions and contingencies 7,080 17,105 141.6% 30,112.0 27,966 -7.1%
Profit before tax 10,923 16,794 53.7% 41,769 52,697 26.2%
Tax 1,729 5,801 235.5% 13,685 20,301 48.3%
Profit after tax/ (loss) 9,194 10,993 19.6% 28,084 32,396 15.4%
Net profit margin (%) 12.4% 13.7% 16.4% 18.2%
No. of shares (m) 526.3 526.3 526.3 526.3
Diluted earnings per share (Rs)* 69.9 83.5 71.1 82.1
P/E (x) 7.4
* annualised

The country's largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 4 trillion. The bank, with its wide network, has diversified business interests including project finance, personal finance, housing finance, mutual funds, investment banking and insurance apart from traditional corporate lending. It is also an active trader in forex and is the leader in cash management services. SBI has a network of over 9,000 branches and 4,661 ATMs across the country.

What has driven performance in 3QFY05?
Core income aids operating margins: Despite its size, SBI continues to show improvement in its advances growth. Compared to nearly 14% growth in 3QFY04, the advances growth in 3QFY05 stood at over 29% while deposits grew by 15%. The growth in retail advances stood at just over 31% indicating that the bulk of the advances growth in 3QFY05 has come from this segment. Although the bank has not divulged details of growth in corporate segment, we estimate that the same has also been significant in the third quarter. The benefits of higher advances growth are visible in the topline performance of the bank. It is important to note that the fall in SBI's yield on advances in 3QFY05 (7.8%, from 8.4% in 3QFY04) is relatively lower compared to earlier quarters. This has also led to the improvement in the topline. On the other hand, the fall in yield (from 8.6% to 7.9%) on its investment portfolio has been relatively larger. Economizing through access to lower cost of deposits has further marginalized the bank's interest expenses and thereby aided net interest income growth. However the same has not been commensurate with the asset growth leading to no visible change in the net interest margins (NIM), which stood at 2.9% in this quarter.

Other income fillip: One of the main highlights of the results has been the extraordinary growth (99% YoY) in the bank's other income component. While the additional resources deployed in treasury operations during the nine-month period have grown by a marginal 4%, the bank seems to have made heavy gains in treasury operations. Also, the fact that the fee-based income of the bank has grown by 25% YoY, suggests that the bank is reducing reliance on treasury operations.

Provisioning pares bottomline: It must recollected that SBI had made changes in its accounting policy during the first quarter of FY05 which had allowed it to be temporarily lenient on its provisions for the first two quarters. However, the incremental provisions of 3QFY05 seem to compensate for the same and are in tune with the fact that the bank needs to exercise caution given its healthy credit growth. The NPAs of the bank have also progressively reduced over last few quarters, standing at 2.5% in this quarter.

What to expect?
At the current price of 609, SBI's stock is trading at 7.4 times annualised 9mFY05 earnings and 1.6 times 9mFY05 book value. Capital adequacy ratio of the bank stands at 12.6% and it is envisaging further capital infusion in the coming quarters to sustain its growth momentum. While the core income growth continues to be enthusing, the bank needs to further marginalize its incremental asset slippage. The bank is also embarking on an overseas expansion drive that is likely to improve its credit standing and give it a better visibility in the overseas markets. Given its crucial role in the forthcoming consolidation drive in the sector and being well positioned to capitalize on the same, we believe that the current valuations do not seem to factor in the positive upsides.

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