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SBI: Margins leave a lot to be desired - Views on News from Equitymaster

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SBI: Margins leave a lot to be desired
May 14, 2010

SBI declared its FY10 results. The bank has reported 11% YoY growth in interest income while its net profits have remained flat year on year. Here is our analysis of the results.

Performance summary
  • Interest income grows by 11% YoY in FY10 on the back of 17% YoY growth in advances.
  • Net interest margins slip to 2.7% in FY10 from 2.9% in FY09.
  • Cost to income ratio increases from 47% in FY09 to 53% in FY10 on the back of additional hiring.
  • Gross NPAs rise to 3.0% from 2.9% in FY09 while net NPAs remain at 1.7%.
  • Capital adequacy ratio at 13.4% (as per Basel II) at the end of FY10.
  • Board declares final dividend of Rs 20 per share, in addition to interim dividend of Rs 10 per share (dividend yield 1.4%).


Rs (m) FY09 FY10 Change FY09 FY10 Change
Interest Income † 173,493 †††† 179,656 3.6% †††† 637,884 †††† 709,939 11.3%
Interest Expense 125,004 †††† 112,441 -10.1% †††† 429,152 †††† 473,224 10.3%
Net Interest Income ††† 48,489 ††67,215 38.6% †††† 208,732 †††† 236,715 13.4%
NIM (%)       2.9% 2.7%  
Other Income ††† 47,182 ††45,085 -4.4% †††† 126,907 †††† 149,681 17.9%
Other Expense ††† 42,831 ††60,361 40.9% †††† 156,487 †††† 203,186 29.8%
Provisions and contingencies ††† 15,569 ††21,702 39.4% ††40,339 ††40,954 1.5%
Profit before tax ††† 37,271 ††30,237 -18.9% †††† 138,813 †††† 142,256 2.5%
Tax †9,778 ††11,570 18.3% ††47,600 ††50,594 6.3%
Profit after tax/ (loss) ††† 27,493 ††18,667 -32.1% ††91,213 ††91,662 0.5%
Net profit margin (%)       12.8% 12.9%  
No. of shares (m)       634.8 634.8  
Book value per share (Rs)*         †1,038.9  
P/BV (x)         2.1  
* (Book value as on 31st March 2010)

What has driven performance in FY10?
  • Accretion of Rs 50 bn to savings accounts and Rs 70 bn to current account every month would be a privilege banks globally would love to have. But for SBI this surplus liquidity tuned out to be a bone for contention in FY10. The bank had a negative carry (interest loss) of Rs 22 bn on this account this fiscal. Despite shunning bulk deposits, the term deposits comprised 53% of the bankís deposits in FY10. Nevertheless, SBI had the second largest proportion of CASA amongst Indian banks at the end of FY10. Infact its CASA base is now bigger than the balance sheet size of 50% of banks in India. In rural deposits the proportion of CASA stood at 58%, signifying the impact of financial inclusion.

    SBI made an appreciable effort to increase its market share in both deposits (17.7% in FY10) and advances (16.3% in FY10). The bank tapped its relationships with large corporates as well as retail customers, to grow its deposit base. However, not all of it could be deployed profitably. As a result, the bank witnessed nearly 0.2% drop in net interest margins. In the retail segment, home loans (comprising over 29% of the bankís retail advance book) grew by 32% YoY, auto loans by 45% YoY in the last 12 months. In home loans, the bank has an average ticket size of Rs 1.0 m, making the most of its priority sector lending. The bank had market share of 24% in home loans and 17% in auto loans at the end of the fiscal.

    Balancing act...
    (Rs m) FY09 % of total FY10 % of total Change
    Advances 5,485,400   6,414,800   16.9%
    Agriculture 523,150 9.5% 611,580 9.5% 16.9%
    International 863,010 15.7% 970,710 15.1% 12.5%
    Retail 1,207,200 22.0% 1,505,470 23.5% 24.7%
    SME 958,930 17.5% 1,108,120 17.3% 15.6%
    Large corporates 1,933,110 35.2% 2,218,920 34.6% 14.8%
    Deposits 6,992,700   7,425,460   6.2%
    CASA 2,733,960 36.6% 3,465,630 42.9% 26.8%
    Term deposits 4,258,740 60.9% 3,959,830 53.3% -7.0%
    Credit/Deposit 78.4%   86.4%    

  • The bankís fee income showed a healthy growth of 27% YoY, bringing the fee to total income ratio to 22.5% in FY10 from 17.6% in FY09.

  • The bank hired 3,350 employees this fiscal. This combined with additional contribution for pension as well as wage revision led to the sharp uptick in the cost to income ratio of the bank from 47% in FY09 to 53% in FY10. We see this ratio stabilizing at the current levels in the near future.

  • SBI did feel the heat on its NPAs in the past 12 months with gross NPAs rising to 3% of advances from 2.9% in FY09. Net NPAs remained at 1.7%. Also, the bank does foresee some delinquency risks in its SME and retail loan books going forward. The provision coverage ratio stood at around 59% in FY10 and the bank needs to bring it up to 70% by 1HFY11. SBI also revealed that of its Rs 168 bn of restructured assets about 10% have turned into NPAs so far.

  • 95% of SBIís urban branches and 93% of its rural branches were profitable last fiscal.

What to expect?
At the current price of Rs 2,223, the stock is trading at 1.6 times our estimated FY12 standalone adjusted book value. SBIís balance sheet growth continues to remain ahead of the industry due to its widespread rural and semi-urban presence. 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. Having said that most of the medium term upsides seem to be already priced in. We may have to revise our estimates if the bank goes in for additional equity dilution this fiscal.

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