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SBI: Disillusioning performance! - Views on News from Equitymaster
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SBI: Disillusioning performance!
May 19, 2006

Performance summary
Being a proxy to the Indian banking sector, the country’s largest banking entity, SBI, has registered disappointing numbers for 4QFY06, reflecting the liquidity and margin pressures being faced by the sector over the past quarter. Loss of treasury income and exponential rise in operating costs also vindicate the operational impediments being faced by PSU banks. Nevertheless, the impact of IMD redemption and control of NPAs have been benign for the bank.

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 95,582 85,091 -11.0% 324,280 357,949 10.4%
Other Income 18,405 26,770 45.4% 71,199 73,887 3.8%
Interest Expense 53,383 49,545 -7.2% 184,834 201,593 9.1%
Net Interest Income 42,199 35,546 -15.8% 139,446 156,356 12.1%
Net interest margin (%)       3.4% 3.4%  
Other Expense 34,607 29,544 -14.6% 100,742 117,251 16.4%
Provisions and contingencies 4,698 13,391 185.0% 44,688 43,931 -1.7%
Profit before tax 21,299 19,381 -9.0% 65,215 69,061 5.9%
Tax 10,147 10,848 6.9% 22,171 24,995 12.7%
Profit after tax/ (loss) 11,152 8,533 -23.5% 43,044 44,066 2.4%
Net profit margin (%) 13.1% 8.9%   13.3% 12.3%  
No. of shares (m)       526.3 526.3  
Diluted earnings per share (Rs)*         83.7  
P/E (x)         10.4  
* (trailing 12 months)            

The country’s largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 4 trillion (Rs 4,000 bn). Although the bank's loan book is largely skewed towards corporate (53% in FY06), 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 9,000 branches and 5,575 ATMs across the country. At the end of FY06, the State Bank group held 23% of the gross advances and 24% of the deposits of the Indian banking sector.

What has driven performance in 4QFY06?
Margins – balancing act: SBI’s advance book (29% YoY growth), had a healthy composition of corporate, retail, agricultural and international assets at the end of FY06. What is also enthusing is the fact that the top corporates and agricultural loans (sub-PLR loans) together comprised only 25% of the bank’s advance book. Of the agricultural loans, approximately 30% comprised of loans upto Rs 0.3 m, which carry a subsidised interest rate of 7% per annum. Though the bank continues to emphasise on its retail portfolio (23% of credit book) that grew by 32% YoY in FY06, it has adopted a cautious stance on the home loan segment (52% of retail portfolio, gross NPAs 3%). A higher emphasis was laid on the high yielding mid-corporate segment. While the mid corporate segment contributed to 33% of the incremental loan growth in FY06, the retail segment contributed 26%. The bank expects the advance book to register a growth of 23% YoY in FY07.

The bank’s net interest margins made a balancing act and stood at 3.4% during FY06 (same as in FY05). This was primarily because of the pressure on yields of incremental loans and a tepid deposit growth (4% YoY) after the IMD redemption. Thus, most of the funding was done through high cost borrowings. The bank expects a deposit growth of 17% YoY in FY07. Also, going forward, with the revision in the bank’s benchmark PLR, it expects the NIMs to go up to 3.5%, despite the funding pressures.

CD ratio - IMD redemption effect…
(Rs m) 4QFY05 % of total 4QFY06 % of total Change
Advances 2,023,740   2,616,420   29.3%
Retail 464,540 23.0% 610,670 23.3% 31.5%
Corporate 1,559,200 77.0% 2,005,750 76.7% 28.6%
Deposits* 3,670,480   3,800,460   3.5%
Credit deposit ratio 53.2%   71.3%    
*including IMDs

Other income – bond effect: A rise of 100 basis points in the 10 year G-Sec yield in FY06 (currently 7.6%) has led to considerable erosion in SBI’s treasury book in FY06. The same has been evident in the 67% YoY fall in the profit on sale of investments. Also, the fee income, which comprised 54% of total other income in FY06 (50% in FY05) could not insulate the other income losses. It may be recalled that the change in computation of commission on government business (from value to volume based) had hit SBI’s fee income in FY06. The bank, despite growing its government business volumes by 20%, had seen commissions from the same fall by 20% YoY during 9mFY06. With the recent revision in service charges, the bank expects its fee income to grow appreciably in FY06. Nevertheless, with the rising bond yields, mark to market losses for the G-Secs in the AFS basket (available for sale) cannot be ruled out.

(Rs m) FY05 FY06 Change
Fee income 35,446 39,962 12.7%
Profit on sale of investment 17,753 5,872 -66.9%
Forex & leasing income 6,684 5,445 -18.5%
Dividend 3,021 3,172 5.0%
Exch profit on IMD redemption - 5,315  
Others 7,382 14,120 91.3%
Total non interest income 70,286 73,886 5.1%

Pension drag: SBI’s staff costs registered a growth of 18% YoY mainly due to wage revision and higher contribution to pension fund. The cost to income ratio escalated from 48% in 4QFY05 to 56% in 4QFY06 (one of the highest in the sector). While the bank does not see the same reducing going forward (as there are no VRS plans on the anvil), it hopes to derive the benefits of ‘employee-repositioning’ in the longer term.

NPAs – provision light: Besides the reduction in Net NPAs in percentage terms (from 2.7% in FY05 to 1.8% in FY06), the bank has also succeeded in paring the same in absolute terms. This is primarily due to the resolution of the treatment of the stressed ‘Dabhol assets’ as standard assets and sale of stressed assets to restructuring agencies and other banks. This has also enabled the bank to write back some of its NPA provisions (coverage 53% in FY06 from 57% in FY05). The bank has set a target of net NPAs below 1.5% for FY07.

What to expect?
(FY06, %) SBI SBI Group
RoE 15.5 14.9
NIM 3.4 3.5
Net NPA 1.9 1.6
CAR 11.8 12.6
At the current price of Rs 870, the stock is trading 1.4 times our estimated FY08 adjusted book value. Despite being well poised to capture the growth opportunities, the bank’s sudden slow down in growth and profitability is our key concern. It must, however, be taken into account that the bank, together with its associates (SBI’s stake to be unlocked in the same) and non-banking subsidiaries, holds considerable value for the investor.

During FY06, SBI acquired equity stakes in Indian Ocean International Bank Limited (IOIB), Mauritius, Giro Commercial Bank (Kenyan bank) and an Indonesian bank. The bank has cited that it will continue to pursue the inorganic growth route in the overseas markets to grow it international business and the benefits of that will filter in, in the long term.

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