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SBI: The juggernaut rolls on… - Views on News from Equitymaster
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SBI: The juggernaut rolls on…
Jan 28, 2006

Performance Summary
SBI, the country’s largest banking entity declared results for third quarter and nine months ended December 2005 today. In a stark distinction to its past stellar performances, SBI has shown a very tepid performance for the said quarter. The bank, despite remaining consistent in terms of topline growth, has shown signs of significant slowdown in net interest income. While a high base effect has resulted in the fall in treasury income, escalating costs and tax liabilities further eroded the bank’s margins.

Rs (m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Income from operations 80,291 95,582 19.0% 237,805 272,859 14.7%
Other Income 22,380 18,405 -17.8% 54,293 47,116 -13.2%
Interest Expense 43,689 53,383 22.2% 137,865 152,047 10.3%
Net Interest Income 36,602 42,199 15.3% 99,940 120,812 20.9%
Net interest margin (%)       3.3% 3.5%  
Other Expense 25,081 34,607 38.0% 73,569 87,706 19.2%
Provisions and contingencies 17,105 4,698 -72.5% 27,966 30,539 9.2%
Profit before tax 16,796 21,299 26.8% 52,698 49,683 -5.7%
Tax 5,801 10,146 74.9% 20,301 14,147 -30.3%
Profit after tax/ (loss) 10,995 11,153 1.4% 32,397 35,536 9.7%
Net profit margin (%) 11.5% 13.9%   13.6% 13.0%  
No. of shares (m)       526.3 526.3  
Diluted earnings per share (Rs)*         87.8  
P/E (x)         10.4  
* (trailing 12 months)            

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 (63% of non-food 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 9,000 branches and 5,000 ATMs across the country.

What has driven performance in 3QFY06?
Margins – ex IMD: SBI’s advance growth, though at a healthy 27% YoY in 3QFY06, is lower than the 30% plus rates clocked by the bank in the past few quarters. The same is commendable in the light of the fact that the growth is being achieved on an advance base of around Rs 2,000 bn. To put things in perspective, SBI is adding advances equal to that of HDFC Bank every half-year. Though the bank continues to emphasise on its retail portfolio (25% of credit book) that grew by 24% YoY in 3QFY06, it has adopted a cautious stance on the home loan segment (54% of retail portfolio). The same is also evident from the fact that the exposure to retail segment has marginally reduced and growth in the corporate book was higher during 3QFY06. The same might also suggest better incremental offtakes in the corporate loan portfolio going forward.

The bank witnessed an expansion in its net interest margins by 20 basis points (3.5% in 3QFY06) that can be accredited to fall in cost of deposits. The caveat that needs to be highlighted here is that SBI has not been able to retain a very significant proportion of the IMDs. Funds retained have also been garnered at high costs. The same will mean higher borrowing costs for the bank in the medium term, which might dent its margins.

CD ratio - sudden spurt!
(Rs m) 3QFY05 % of total 3QFY06 % of total Change
Advances 1,957,310   2,485,980   27.0%
Retail 504,595 25.8% 625,721 25.2% 24.0%
Corporate 1,452,715 74.2% 1,860,259 74.8% 28.1%
           
Deposits 3,506,300   3,637,310   3.7%
Credit deposit ratio 55.8%   68.3%    

Other income – base effect: The change in computation of commission on government business (from value to volume based) has not hit any other bank as hard as SBI. The bank despite growing its government business volumes by 20% in 1HFY06 saw commissions from the same fall by 20% YoY during 3QFY06. Fall in profit on sale of investment also added to the other income woes. Since the bank continues to have a considerable proportion of GSecs in the AFS basket (available for sale - approximately 55%), risks on the treasury side cannot be sidelined.

People problem: SBI’s staff costs registered a growth of 23% YoY mainly due to wage revision and higher contribution to pension fund. The cost to income ratio thus, has stagnated at 50% (one of the highest in the sector). While the bank does not see the same reducing going forward (as there are no VRS plans on the anvil), it hopes to derive the benefits of ‘employee-repositioning’ in the longer term.

Well covered: Although the net NPAs of the bank have reduced in percentage terms (from 2.6% in 3QFY05 to 1.7% in 3QFY06), there has been little success in paring the same in absolute terms. It may also be noted that once the bank gets the approval to treat the stressed ‘Dabhol assets’ as standard assets (which is likely sometime later in FY06 or FY07), it may see the net NPAs come down to 1.5% of advances. The bank despite writing back some provisions has an adequate coverage ratio of 63% for NPAs, which adds to our comfort.

What to expect?
During FY06, SBI acquired equity stakes in Indian Ocean International Bank Limited (IOIB), Mauritius. This was followed by acquisition of 76% stake in Giro Commercial Bank (Kenyan bank) in 2QFY06, which has an asset base of US$ 60 m. The bank cited that it will continue to pursue the inorganic growth route in the overseas markets to grow it international business (international business stood at US$ 7 m in 1HFY06) and the benefits of that will filter in, in the longer term. Inability to contain costs and higher borrowing costs in the aftermath of the IMD redemption is likely to dampen the bank’s margins in the coming quarters too. The benefits of tax refund that the bank has been reaping over the past few quarters are also not sustainable in the longer term and this will have a ‘visible’ impact on the bank’s profitability going forward.

At the current price of Rs 914, the stock is trading 1.4 times our estimated FY08 adjusted book value. Though SBI remains well poised to capture the growth opportunities in the sector, we believe that the valuations are skewed towards risk.

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