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SBI: Good things come last! - Views on News from Equitymaster

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SBI: Good things come last!
May 12, 2007

Performance summary:
India’s largest banking entity, SBI, announced results for the fourth quarter and fiscal ended March 2007. The results for both the periods under review are in stark contrast to each other. While the bank recorded a strong 75% YoY growth in its bottomline in the fourth quarter, the full year results have remained flat. As seen in the past few quarters, the bank’s deposits could not match the pace of advance growth and thereby pressurised its net interest margins (NIMs), as they contracted by 10 basis points during FY07. The full years results were also impacted by a substantial rise in NPA provisioning and higher tax incidence.

Rs (m) 4QFY06 4QFY07 Change FY06 FY07 Change
Interest Income 85,090 115,414 35.6% 359,795 394,910 9.8%
Interest Expense 49,545 72,213 45.8% 203,904 234,368 14.9%
Net Interest Income 35,545 43,201 21.5% 155,891 160,542 3.0%
NIM (%)       3.4% 3.3%  
Other Income 23,616 28,942 22.6% 43,849 57,692 31.6%
Other Expense 29,544 32,460 9.9% 117,251 118,235 0.8%
Provisions and contingencies 10,237 14,126 38.0% 13,429 24,097 79.4%
Profit before tax 19,380 25,557 31.9% 69,060 75,902 9.9%
Tax 10,847 10,626 -2.0% 24,994 30,489 22.0%
Profit after tax/ (loss) 8,533 14,931 75.0% 44,066 45,413 3.1%
Net profit margin (%) 7.4% 17.5%   11.2% 12.6%  
No. of shares (m)       526.3 526.3  
Diluted earnings per share (Rs)*       83.7 86.3  
P/E (x)         13.3  
* (12 months trailing)

The country’s largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 5 trillion (Rs 5,000 bn). Although the bank's loan book is largely skewed towards corporate (68% of total advances in FY07), the retail side is also fast catching up. The bank has been a major beneficiary of the current upturn in investment cycle and has continued to witness substantial growth in both retail and corporate segments. It is also an active trader in forex and is the leader in cash management services. SBI has a network of over 9,373 branches and 5,800 ATMs across the country. 90% of the bank’s branches are on CBS platform at the end of FY07.

What has driven performance in 4QFY07?

Advances – Shy of retail: The fact that the country’s largest banking entity was able to contain the loss of market share in advances (16%) and deposits (15%), which has been falling sequentially over the past few years, in this fiscal, is visible in its balance sheet growth in FY07. The bank’s franchise of over 9,300 branches, 90 m customers and relationships with 80% of the large and 50% of the mid-sized corporates has helped it grow its balance sheet by Rs 727 bn in FY07 (the balance sheet size of UTI Bank at the end of FY07).

While the bank’s advance growth (28% YoY) was in line with the sector average, unlike its peers in the private sector, the bank chose to concentrate on the mid corporate and agricultural sector. We believe that while the former was due to the better yields available in the sector, the agricultural loans were a result of the government directives towards priority sector lending. Home loans (grew 18% YoY) comprising over 52% of the bank’s retail advance book, constituted 47% of the incremental retail off take in FY07. The bank’s well-penetrated franchise also helped it grow the agricultural advances at 33% YoY during FY07.

As compared to the bank’s performance on the advances front, the deposit growth was muted. As at the end of March 2007, SBI’s deposits grew by 15% YoY. The cost of deposits, excluding IMDs (India Millennium Deposits), marginally increased from 4.6% in March 2006 to 4.8% in March 2007. This was despite the bank’s successive increases in deposit rates in 2006 and 2007. However, the bank’s CASA (current account savings account) ratio dropped from 47.6% as at the end of March 2006 to 43.6% in March 2007. While the net interest margins have declined by 10 basis points over that of FY06, the same, removing the effect of the IMDs and a one-off item, have expanded by 30 basis points (2.9% in FY06).

Funding constrained…
(Rs m) FY06 % of total FY07 % of total Change
Advances 2,674,580   3,422,320   28.0%
Agriculture 263,050 9.8% 349,930 10.2% 33.0%
Retail 610,590 22.8% 735,960 21.5% 20.5%
Mid corporates 649,310 24.3% 874,620 25.6% 34.7%
Large corporates 1,151,630 43.1% 1,461,810 42.7% 26.9%
Deposits 3,800,460   4,355,210   14.6%
CASA 1,809,019 47.6% 1,897,565 43.6% 4.9%
Term deposits 1,991,441 52.4% 2,457,645 56.4% 23.4%
Credit/Deposit 70.4%   78.6%    

Other income – IMD effect: SBI’s other income grew by 32% YoY during FY07. Despite the high base effect of the foreign exchange profit on redemption of the IMDs in FY06 and 21% YoY lower forex income in FY07, the 20% YoY growth in fee income and 88% higher dividend income made up for the losses.

Lower employee costs filter in: SBI’s staff costs registered a contraction of nearly 5% (as percentage of total income) during FY07. Consequently, the cost to income ratio declined from 58.7% in FY06 to 54.2% in FY07. While nearly 7,000 employees exited the bank under an exit policy in FY07, around 6,000 employees are expected to retire annually for the next couple of years. We expect the same to reduce further going forward as 38,000 employees retire from the bank’s payrolls by 2010. The new recruitments of the bank are merely 15% of the total number of employees retiring every year.

NPAs - No surprises: SBI reported no negative surprises on the NPAs side with both gross and net NPAs reducing to 2.9% and 1.6% of advances respectively in 4QFY07, from 3.6% and 1.9% respectively in 4QFY06. Having said that, the slippages to the tune of Rs 50 bn in FY07 (Rs 10 bn higher than in the past few fiscals) was due to the directed lending in the SME and retail sectors. The higher NPA provisioning in this fiscal is due to the low base effect in FY06 due to the write back of provisioning - with the re-classification of the Dabhol assets as standard ones.

Capital raising and group restructuring in the offing: The bank plans to raise Rs 150 bn within the current financial year to bolster capital and meet the growing credit demand. This may be by way of debt or equity or a combination of the two. The bank expects its CAR (12.3% in FY07) to be impacted by 80 basis points due to Basel II compliance.

SBI is planning to foray into general insurance and has shortlisted two to three foreign players in the segment. The bank is also planning to get into pension funds management through either SBI Life or SBI Mutual Fund. Entry into the financial planning and wealth management segments is also on the cards. Going forward, the bank is planning to set up an NBFC that would be a holding company for all its non-banking businesses and would be listed separately.

What to expect?
At the current price of Rs 1,149, the stock is trading at 1.6 times our estimated FY09 standalone adjusted book value. The bank has declared dividend of 140% (dividend yield 1.2%). While 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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