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SBI: Research meet extracts
Feb 21, 2005

We recently met SBI to understand what is it that has made the banking behemoth (oft referred to as proxy for the Indian economy) the benchmark for the best banks in the country. Our interaction with the management gave us the following insights into the ‘new face’ of SBI.

Countering challenges…
The bank reported a stellar performance during 9mFY05. Besides being aided by a robust credit growth, the same has been possible because of the bank’s proactive approach in countering the challenges.

Challenge: Technological upgradation
Tackled by: The bank initiated the computerization process way back in early 1990s which gradually picked up pace. Computerisation of all the branches was completed by January 2004 and simultaneously core-banking solution (CBS) was introduced. Today the bank has over 9,000 fully computerised branches including 1,024 CBS enabled branches and 4,661 ATMs. By FY06 the number of CBS enabled branches is expected to go up to 3,000 putting about 65% of the business on the networked platform.

Challenge: HR policies
Tackled by: Automation of services and technological upgradation necessitated the redeployment of employees to other areas of operation. The excess employees were re-deployed into marketing of own products as well as cross selling of the products of its subsidiaries (insurance, mutual funds etc.). Staff was also deployed in dedicated loan recovery teams and going forward the bank plans to open a general insurance subsidiary that will access human resources from the banking business.

Challenge: Operational loopholes
Tackled by: The bank has tried to bring in ‘single window service’ for most of its services, which has not only resulted in being more convenient for customers but also helped the bank in rationalizing its staff through VRS.

Business Process Re-engineering (BPR)…
During 9mFY05, the bank initiated a BPR program that concentrated on the following aspects:
  • Processing time: The processing time for loan approvals and disbursements earlier differed from branch to branch. This has now been corrected by directing all the loan related documents to a centralized office and thereby ensuring better monitoring of the processing time as well as faster disbursal of the same. The fact that this initiative will augur well for the bank’s bottomline is evidenced in its estimated employee efficiency parameters.

  • Quality of assets: Centralising loan appraisals and forming dedicated teams for loan recovery has enabled the bank to prune its loss assets to a significant extent. Separate teams have been formed for corporate and retail loans. Also, conservative provisioning for possible slippages has shielded the bank from a drastic deterioration in asset quality. However, the fact that the bank’s retail NPAs continues to linger at abnormally high levels of 3% is a subject of concern.

  • Restructuring of SBUs: The BPR program also included a restructuring of the bank’s SBUs. The bank now has specialized SBUs concentrating on different levels of corporate banking, government banking, international banking and NPA management.

Although the above initiatives will not bear fruit with immediate effect, the results will become more ‘visible’ in the long term.

Mobilizing funds…
SBI is set to redeem the IMDs (India Development Bonds) on 29th December 2005. The deposits to the tune of US$ 5 bn were garnered at a coupon rate of 7.7% in the year 2000 (when the US 5-year treasury bonds were fetching 4.9 %) and will entail an outgo of approximately US $ 7.3 bn (Rs 316 bn). SBI has mobilized funds for the same by shifting its near-term investments to those maturing in 2005 and is envisaging Tier II borrowings of Rs 40 bn in FY06. The NRI investors (who have subscribed to IMDs) will also be given the option of parking their funds in fresh deposits to be accepted by the bank, thereby limiting the outgo of funds from the bank. Considering the fact that the domestic interest rates continue to be much higher than those abroad, the possibility of investors responding positively to the offer remains high. However, the bank has made it clear that this time around the coupon rate for NRI investors will be market determined and thus lower than the IMDs. Therefore, redemption of IMDs will also substantially reduce the bank’s cost of funding thereby improving its interest margins.

Spreading its wings…
SBI has recently concluded a US$ 8 m deal to acquire 51% stake in Mauritius based Indian Ocean International Bank (IOIB). Although SBI was already operating in Mauritius through an overseas branch, the licensing restrictions in that country did not permit it to conduct domestic business. The said acquisition will now enable SBI to garner business in the overseas market. The bank is contemplating investments to the tune of Rs 8.6 bn in international operations in the coming years.

Future vision…
The bank at present is in the process of transformation and sees itself witnessing a sea change in terms of operational process as well as business focus. Going forward the bank will not only emphasize on ‘garnering business’ through its marketing initiatives but will also capitalize on its ‘government – related’ business to amplify its fee based income. In terms of growth in loan book, the bank is skeptical about sustaining the current growth rate (of over 25%). On a conservative basis, the bank expects a 20% to 23% growth in asset book over the next 2 to 3 years (26% in 9mFY05) and has targeted to increase NIMs (net interest margins) to 3.15% to 3.2% for FY05 (2.9% in 9mFY05). With the statutory impediments in place, a merger with its associate banks is unlikely in the short term. However, on the upside, all the associate banks are already networked with SBI and are operating on a common software platform.

Our view
Based on our interaction with the bank, we believe that, the BPR initiatives are likely to become ‘visible’ in the balance sheet of the bank in the next two to three years. Despite being the largest bank in the country, SBI has continued to prove its mettle against the more aggressive private sector banks. It is also well placed to exploit the potential that is likely to arise once the investment cycle picks up. However, our discomfort remains with the fact that the bank continues to be plagued by high NPA levels (especially in the retail segment).

At the current price of Rs 658 the stock is trading 1.4 times its 9mFY05 adjusted book value (higher end of the valuation band 1x to 1.5x). However, taking into consideration the future ‘earning potential’ of the bank, in the wake of lower cost of funds and better efficiency, there is an upside to the stock in the long term. Also, its mutual fund and insurance subsidiaries are likely to aid the bank’s growth in future and enable to shape up as a ‘universal’ bank with a wider range of products

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