SBI: Squeeze in interest margins - Views on News from Equitymaster

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SBI: Squeeze in interest margins

Mar 15, 2002

During the first nine months, the banking sector in general witnessed a lack of credit demand. Most of the banks however, managed to show a double digit growth in income, driven by a strong rise in investment income. India's largest public sector bank, SBI too maintained its financial performance in 9m FY02 with a marginal rise in core interest income.SBI has one of the largest investment portfolio of government securities of about Rs 1 trillion with an average maturity period of 3-4 years. The bank's average yield on investments stood at 10.5% as on March 2001. Consequently, the bank continued to earn higher interest on investments at this rate in the current year, despite a sharp fall in G-Sec yields over the last 9 months. Instead of booking capital gains on gilt portfolios, the bank opted to earn interest income on the same.

However, the bank is likely to face a steep decline in income from investments in FY03 as its incremental investments in gilt paper is at a much lower yield compared to its average yield on investments in FY01. With low ruling interest rates, any adverse movement in rates could result in the bank having to make higher provision for depreciation in investment portfolio. The bank's net interest margins (NIM) are then likely to fall to about 2.9% in FY03 from 3% in FY01.

Investment income accounted for 48% of the bank's total income and the contribution from interest on advances declined to 38%. SBI's advances in the first nine months grew by a marginal 8% after having grown at a compounded annual growth rate (CAGR) of 15% in the last four years. The bank is foraying aggressively into the retail market by offering personal loans at the cheapest cost. This could enable the bank to post about 10% rise in advances for the entire year 2002. However, its interest spread is expected to come under stiff pressure with its focus on growing volumes. The bank's core loan spread is forecasted to come down by about 30 basis points to 2.7% towards the end of current fiscal.

Rs m)9m FY019m FY02ChangeFY02E
Income from operations 185,469 220,36818.8% 284,169
Other Income 25,395 29066.614.5% 44,196
Interest expense 127,165 154,53821.5% 193,552
Net interest income 58,303 65,83012.9% 90,617
Other expenses 50,094 52,3304.5% 75,545
Operating Profit 8,209 13,50064.5% 15,072
Operating Profit Margin (%)4.4%6.1% 5.3%
Provisions and contingencies 15,500 13,113-15.4% 23,230
Profit before Tax 18,104 29,45462.7% 36,038
Tax 5,477 11,295106.2% 12,613
Profit after Tax/(Loss) 12,627 18,15943.8% 23,425
Net profit margin (%)6.8%8.2% 8.2%
No. of Shares 526.3 526.3   526.3
Diluted Earnings per share*31.945.9 44.5
P/E Ratio    
*(annualised)    

SBI's non-performing assets figure has declined by 15% in the first nine months of the current year. The bank is however, expected to increase the provision in the fourth quarter to adhere to the new banking regulation (provisioning requirement for NPAs to be changed to 90 days by FY04 from the current 180 days). Earnings growth of the bank as a result, is expected to be about 14% for FY02.

At the current market price of Rs 232, SBI is trading at an adjusted Price/Book value ratio of 2x and P/E multiple of 5x, FY02 projected earnings. Over the last four years, SBI's stock has moved in the range of Rs 160 - Rs 280.

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