Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
SBI: Equipped for challenges - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

SBI: Equipped for challenges

Feb 1, 2008

Performance summary
  • Interest income grows by 34% YoY in 3QFY08 on the back of 26% YoY growth in advances. Other income grows by 48% YoY.

  • Net interest margins decline to 3.0% (net of CRR balances).

  • Cost to income ratio drops sharply to 47% in 3QFY08 from 55% in 3QFY07.

  • Rights issue in the multiple of 1:5 (1 share allotted for every 5 shares held by investors) on the anvil.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest Income 94,463 126,668 34.1% 267,246 353,735 32.4%
Interest Expense 60,072 84,105 40.0% 162,131 231,529 42.8%
Net Interest Income 34,391 42,563 23.8% 105,115 122,206 16.3%
NIM (%) 3.3% 3.0%
Other Income 18,220 26,971 48.0% 43,478 58,777 35.2%
Other Expense 29,114 32,938 13.1% 85,915 93,639 9.0%
Provisions and contingencies 6,614 8,044 21.6% 12,338 10,495 -14.9%
Profit before tax 16,883 28,552 69.1% 50,340 76,849 52.7%
Tax 6,232 10,466 67.9% 19,858 28,390 43.0%
Profit after tax/ (loss) 10,651 18,086 69.8% 30,482 48,459 59.0%
Net profit margin (%) 8.4% 19.1% 8.6% 18.1%
No. of shares (m) 526.3 526.3 526.3 526.3
Book value per share (Rs)* 594.7
P/BV (x) 3.6
* (Book value as on 31st December 2007)

What has driven performance in 3QFY08?
  • Advances – To get the ‘right’ boost: SBI continued to make an appreciable effort to stall the loss of market share in advances (15.3% in 9mFY08) and deposits (15.5%), which has been falling sequentially until FY07. While the bank’s advance growth (26% YoY) was higher than the sector average, what is more noticeable is that the bank has shied away from lending to the sub-PLR categories (large corporates and some portions of retail. While concentration towards mid corporates has been drawn by risk averseness and high yields respectively, the agricultural loans were a result of the government directives towards priority sector lending. Home loans comprising over 51% of the bank’s retail advance book grew 18% YoY in 9mFY08. The rights issue is expected to further buoy the bank’s advance growth prospects.

    Subprime slowdown…
    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Advances 3,148,500 3,953,430 25.6%
    Agriculture 322,630 10.2% 413,650 10.5% 28.2%
    Retail 701,744 22.3% 821,364 24.8% 17.0%
    Mid corporates 649,310 20.6% 1,004,171 25.4% 54.7%
    Large corporates 1,474,816 46.8% 1,557,651 39.4% 5.6%
    Deposits 4,043,520 5,101,320 26.2%
    CASA 1,712,020 42.3% 2,026,420 39.7% 18.4%
    Term deposits 2,331,500 57.7% 3,074,900 60.3% 31.9%
    Credit/Deposit 77.9% 77.5%

    SBI’s deposits grew by 26% YoY, higher than the sector average. However, the bank’s CASA (current account savings account) ratio dropped from 42.3% in 3QFY07 to 39.7% in 3QFY08. While the net interest margins have been partially impacted by this, the drop of 0.3% is also due to amortisation premia on Investments from net interest income (as per the RBI’s new guidelines).

  • Costs covered up: SBI’s other income grew by 35% YoY in 9mFY08. While the growth in fee income was lower at 16% YoY, the proportion of fee income to total income also dropped to 15.8% from 16.6% in 9mFY07. Growth in operating expenses has been controlled (up 8.9% YoY in 9MFY08) while staff expenses have gone up by 5.2% despite ex-gratia payment under exit option. While nearly 7,000 employees exited the bank under an exit policy in FY07, around 6,000 employees are expected to retire annually for the next couple of years.

  • NPAs - No surprises: SBI reported no negative surprises on the NPAs side with both gross and net NPAs reducing to 2.7% and 1.4% of advances respectively in 9mFY08, from 3.2% and 1.6% respectively in 1HFY07.

  • Rights issue: The government has approved to subscribe to the rights issue of SBI to raise approximately Rs 170 bn and increase the number of paid up shares of the bank from 526 m to 650 m. The rights issue will be in the multiple of 1:5 (1 share allotted for every 5 shares held by investors) with the shares being offered to existing holders at Rs 1,590 per share (nearly 25% discount to the current market price). The total dilution in the equity capital will be to the tune of 25%. This capital raising, to be exercised in 4QFY08, will add approximately Rs 168 bn to the bank's networth, thus inflating its book value by Rs 250 per share on the diluted share capital (of 650 m shares).

What to expect?
At the current price of Rs 2,129, the stock is trading at 1.6 times our estimated FY10 standalone adjusted book value. The bank has launched the reverse mortgage programme that is expected to do well given its widespread rural and semi-urban presence. While the rights issue will be benign for the bank in the near term, the fact that the life insurance venture itself will require investments to the tune of Rs 40 bn in the next 5 years, seems to suggest further dilution of capital or capital raising at higher cost. 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. We retain our view on the stock.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Mar 25, 2019 02:57 PM