The stock price of India’s largest commercial bank, SBI, has been hit by the financial woes of a co-operative bank specializing in bullion trading. (Classic Co-operative Bank issued cheques to four banks including SBI, which subsequently bounced.) The bank is likely to incur damages amounting to Rs 400 m (about 1.5% of its FY01 projected earnings).
SBI, however, did not have any exposure to the Madhavpura Mercantile Cooperative Bank, or to stockbrokers being investigated for the recent scam. Baring the above loss, fundamentals of the bank are intact. SBI reported a profit growth of 29% during the nine months ended FY01. Its operating margins also improved substantially by 250 basis points to 31.5%, comparable to the best in the industry.
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SBI has announced job cuts through VRS. This exercise is expected to improve its return on equity in the coming years through savings in employee cost. The bank has recently received approval from IRDA for its foray into life insurance. SBI will have 74% stake in the venture while the Cardiff SA of France will hold the balance. With a branch network of over 9,000 and established customer contact, the bank is expected to generate sizable profits in the future. However, the key remains quality of the services since competition in the sector is mounting with the entry of private players.
At the current market price of Rs 197, SBI is trading at a P/E of 6 times on 9 months FY01 annualised earnings. Its price to book value ratio of 0.7 times is amongst the lowest in the banking sector. Considering the bank’s size, the bullion market default will not impact its financials significantly. Its cost cutting exercise and favourable interest rate environment will be positives for its earnings. Structural reforms promised by the budget will also make it easier to recover bad loans of the bank.
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