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SBI: Feeling the heat

May 2, 2008

Performance summary
  • Interest income grows by 31% YoY in FY08 on the back of 23% YoY growth in advances. Other income grows by 29% YoY.
  • Net interest margins remain stable at 3.1% in FY08 (excluding the extraordinary items).

  • Cost to income ratio drops sharply to 49% in FY08 from 54% in FY07.

  • Capital adequacy ratio at 13.5% at the end of FY08; return on equity at 17.8%.

  • SBI Cards in losses with high NPAs, other subsidiaries and associate banks continue to perform well. Overall net NPAs at 1.8% of advances in FY08 (1.6% in FY07).

  • To open 2,000 branches and recruit 20,000 employees in FY09.

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest Income 105,177 135,767 29.1% 372,423 489,503 31.4%
Interest Expense 59,710 87,761 47.0% 221,841 319,290 43.9%
Net Interest Income 45,467 48,006 5.6% 150,582 170,213 13.0%
NIM (%) 3.1% 3.1%
Other Income 26,677 28,172 5.6% 67,652 86,949 28.5%
Other Expense 32,460 32,454 0.0% 118,235 126,086 6.6%
Provisions and contingencies 14,126 16,192 14.6% 24,097 26,687 10.7%
Profit before tax 25,558 27,532 7.7% 75,902 104,389 37.5%
Tax 10,626 8,699 -18.1% 30,489 37,097 21.7%
Profit after tax/ (loss) 14,932 18,833 26.1% 45,413 67,292 48.2%
Net profit margin (%) 11.0% 17.9% 9.3% 18.1%
No. of shares (m) 526.3 631.4
Book value per share (Rs)* 776.6
P/BV (x) 2.3
* (Book value as on 31st March 2008)

What has driven performance in FY08?
  • Advances Ė Presence pays off: Despite the mammoth size of its balance sheet, SBI managed to grow in line with the industry in FY08, at a time when several of its smaller peers in the public as well as private sector banking space bore the brunt of economic slowdown. The bank continued to make an appreciable effort to stall the loss of market share in advances (15.3% in FY08) and deposits (15.4%), which had been falling sequentially until FY07. The growth in deposits was driven by low cost deposits where SBIís market share increased from 13.9% in FY07 to 17.4% in FY08. The fact that the bank has presence across all geographies including rural and semi-urban areas and is increasing its footprint in the international markets proved particularly beneficial this year, as it helped the bank tap the international and SME assets. In the retail segment, home loans (comprising over 51% of the bankís retail advance book) grew by 18.7% YoY, auto loans by 29.9% and education loans by 33.6% YoY in FY08.

    Balancing actÖ
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 3,422,320   4,221,810   23.4%
    Agriculture 349,930 10.2% 436,013 10.3% 24.6%
    Retail 735,960 21.5% 821,364 24.8% 11.6%
    Mid corporates 874,620 25.6% 1,088,027 25.4% 24.4%
    Large corporates 1,461,810 42.7% 1,876,406 39.4% 28.4%
    Deposits 4,355,210   5,374,060   23.4%
    CASA 1,898,872 43.6% 2,310,846 43.0% 21.7%
    Term deposits 2,456,338 56.4% 3,063,214 57.0% 24.7%
    Credit/Deposit 78.6%   78.6%    

    While the net interest margins (NIMs) have been partially impacted by the amortisation premia on Investments (as per the RBIís new guidelines), excluding the impact of this the same has remained flat (3.1%).

  • Costs taper down: The operating costs for the bank increased by only 6.6% YoY in FY08, despite redesign of 2,000 metro and urban branches, addition of nearly 1,000 branches leading to branch network crossing the 10,000 mark and rollout of core banking system to cover 9,390 branches and 98.3% of business. The cost to income ratio has dropped from 54% in FY07 to 49% in FY08. Going forward, we see this ratio moving up to 52% as the bank will set up 2,000 new branches in FY08 and recruit 20,000 new employees. Around 6,000 employees are expected to retire annually for the next couple of years.

  • Delinquencies rear their head: SBI did however feel the heat of aggressive growth on the NPAs side with both gross and net NPAs increasing to 3.0% and 1.8% of advances respectively in FY08, from 2.9% and 1.6% respectively in FY07. The credit card subsidiary of the bank, SBI Cards, is in losses with high NPA levels (16.3% in FY08, among the highest in the industry).

  • Capital comfort: The government had 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. This capital raising has brought the bankís capital adequacy ratio at 13.5% at the end of FY08, leaving it with enough capital to meet Basel II and sustain current growth rate.

What to expect?
At the current price of Rs 1,794, the stock is trading at 1.8 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.

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Mar 22, 2019 (Close)