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SBI: VRS blues - Views on News from Equitymaster
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  • Mar 13, 2001

    SBI: VRS blues

    The budget has provided more than expected benefits to the banking sector. State Bank of India (SBI), India’s largest public sector bank would however not gain as much as its private sector peers through the reforms announced in the budget.

    Among the others, one of the provisions of the budget clarifies on the VRS amortisation. A new section, 35 DDA, has been inserted for the purpose. The section is applicable for the fiscal year 2002 and beyond. It allows amortisation of VRS expenses over five years.

    In other words tax deduction will be allowed only for one fifth of the total expenditure every year starting from fiscal year 2002. Banks, which had intended to charge their VRS expenses at one go may now want to write them off over five years for tax benefits. Also, no tax benefit will be availed in fiscal year 2001, as the new section is applicable only from fiscal year 2002.

    Had the budget allowed writing off the expenses in one year, the tax benefits would have been realized in one stroke, rather than five years, increasing the time value of benefits. The visibility of benefits of staff cuts on wage costs and profitability would have been better from next year, had the banks charged off the expenses this year. The reported returns on equity could have also been higher.

    This provision has put a dent on SBI’s plan to charge the VRS expenses in one year. If the bank writes off the amount in 5 equal installments, its current year profits would not decline (as expected earlier), but it would rather show a growth of around 20%. In FY02 also its earnings would jump by more than 55%. For the year ending March 01, the bank has written off the one-time issue expenses of India Millennium Deposits (IMD). As a result profits are likely to take hit in the current year. However, comparatively low provisions and contingencies in FY02 are expected to fuel profit growth.

    As stated earlier, the returns on equity (ROE) of the bank will not reflect the impact of savings in staff cost. ROE would show a steady pace of growth year on year. This will certainly paint a good picture of balance sheet but the bank’s cash flow would not be very encouraging. Since SBI will pay part of the amount in the current year (estimating that it converts part of expenses into bonds to be payable by 3-5 years), and the benefits would be realized in the long term.

    Returns on a rise
    Years ROE
    FY98 19.40%
    FY99 9.90%
    FY00 16.90%
    FY01E 17.20%
    FY02E 21.60%

    At the current market price of Rs 230, SBI is trading at a P/E multiple of 3.1 times its FY02 earnings and 0.7 times Price/Book value ratio. The bank’s comparatively lower valuations are due to its public sector tag, slow adaptation to technology and the quality of assets & services provided by it.



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