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Analyst meet excerpts: SBI
May 23, 2005

Post 4QFY05 results , SBI had its analyst meet to give us a perspective on the banking behemoth’s present business dynamics and future plans. Following are the key excerpts from the same. Business growth
Akin to most of its peers in the industry, SBI witnessed a robust growth in its retail portfolio (40% YoY) in FY05 which bolstered its credit book by 27% YoY. The other segments such as corporate, SME and agriculture also amplified by 20%, 17% and 37% respectively. Of the retail segment (25% of the loan book), the mortgage portfolio (accounting for 54% of retail portfolio) grew by 41% YoY. In the corporate segment, while the ‘top corporate’ segment has grown by 16% YoY, the ‘mid-corporate’ segment that was initiated in 2QFY05 has also shown enthusing results. Of this, project finance portfolio has bolstered by 190% YoY with disbursements going to infrastructure and non-infrastructure segments in the ratio of 1:3. Due to the international initiatives, overseas operations contributed to 5% to the profits of the bank in FY05 (as against 3% in FY04).

Focus on agri-lending, mid corporates and SMEs
Besides retail, the bank has largely focused on agricultural lending, SME and mid corporate segments in FY05. The non-food SME segment has grown by 25% YoY in FY05 (as against 11% in FY04). This includes credit to micro finance institutions to the tune of Rs 7 bn covering 0.2 m self help groups (SHGs). The bank has witnessed 98% recovery from this segment and hopes to augment the credit base to 1m SHGs in FY06.

Treasury portfolio
While the bank has posted 22% growth in profits in 4QFY05, if one excludes treasury losses, the growth in net profit is higher at 56% YoY. The bank anticipates interest rates to remain stable in the medium-term, especially with the softening of crude oil prices and inflation. Although SBI is not contemplating a further shift of assets to the HTM category in FY06 (currently 30% of assets are in HTM category), it would not hesitate to do so if necessitated by an upward movement in interest rates. A matter of comfort here is that the bank has already made provisions for losses in its treasury book upto an escalation of 100 to 120 basis points in interest rates. With this, we believe that the bank is reasonably hedged and well poised to absorb pressure of interest rates in its treasury book.

Asset quality
Although the net NPA to advances ratio of SBI has marginally deteriorated over 3QFY05 (2.6% in 4QFY05 as against 2.6% in 3QFY05), primarily because of lower provisioning, the bank has been successful in containing the incremental delinquencies through reduction in gross NPAs. The same has reduced from almost 8% in FY04 to 6% in FY05. Also, here it should be noted that the retail NPAs that were 3% of advances in FY04 were just over 1% in FY05. Going forward, the bank is targeting net NPA of 2% for FY06.

Redemption of IMDs
The redemption of India Millennium Deposits (IMDs) on 29th December 2005 would lead to an outgo of US$ 6 bn (US$ 5 bn was raised in 2000 at an interest of 7.7% p.a.). The bank will try to retain this fund through its overseas offices and branches. It expects to retain around 35% to 40% of the deposits, as was in the case of redemption of RIBs.

Group performance
The consolidated results of the SBI group have slightly deteriorated over FY04 (3% fall YoY) because of losses in its subsidiary, SBI DFHI. The bank hopes to recover the same in FY06 with the housing finance industry showing signs of buoyancy. On the other hand, SBI Caps (profits grew by 88% YoY) has been one of the best performing subsidiaries, while SBI Factors (with asset turnover of 209%) and SBI Life also hold considerable promise going forward. The group’s net NPA to advances (including that of the associate banks) has reduced from 3.4% in FY04 to 2.4% in FY05.

Going forward…
Credit growth: The bank expects 23% growth in advances and 16% growth in deposits in FY06. It expects a marginal reduction in NIMs (net interest margins) from 3.4% in FY05 to 3.2% in FY06. We have assumed lower NIMs (at 2.9%) and we would like to maintain this stand. On the sourcing of funds side, while the bank acknowledges deposit growth in FY06 to be a concern, it considers securitisation of assets a viable option for bringing in requisite liquidity to meet credit growth. The bank has also not ruled out an equity issue (preference or public), although unlikely in FY06.

Incremental borrowing envisaged:
The bank is contemplating to raise Rs 40 bn of subordinate bonds, a major portion of which would be offered to international investors. The fund would be raised to meet Basel-II capital adequacy norms as well as finance the bank’s expansion plans - both domestic and overseas. However, unlike the earlier international funding plans (RIB and IMD), a portion will be offered to the domestic market as well. The bank’s capital adequacy ratio, which stood at 13% at the end of FY05, is insufficient considering the targeted credit growth and Basel-II capital requirements.

No VRS plans:
The bank has no plans to go in for a VRS in the next couple of years. On the contrary, it expects some natural attrition, which in certain cases might have to be replaced as well. Although staff costs (comprising 70% of operating expenses) are a concern for the bank, the reduction in pension expenditure has marginally lowered these overheads in FY05 and this is expected to continue in FY06.

Overseas expansions:
The bank plans to enhance presence in overseas locations by increasing the number of offices from 54 (at present) to 75 in FY06 with presence in 36 countries. This would also involve overseas acquisitions in Asia and Africa.

Merger of associates:
The bank believes that M&A would be the order of the day in banking sector in the next three to four years and would also see merger of all associate banks with SBI. The merger, on materialisation, would lead to considerable value unlocking for the shareholders.

New lines of business:
SBI is looking at floating a pension subsidiary once the guidelines are clear. The pension fund could also be launched in joint venture with another foreign party. Once this fructifies, it may take a close look at coming up with a general insurance company in future.

Our View
At the current price of 654, SBI’s stock is trading at 1.8 times annualised FY05 adjusted book value. Capital adequacy ratio of the bank stands at 12.4% and it is envisaging further capital infusion in the coming quarters to sustain its growth momentum. While the core income growth continues to be enthusing, the bank needs to further marginalize its incremental asset slippage. The bank has also embarked on an overseas expansion drive that is likely to improve its credit standing and give it a better visibility in the overseas markets. Given its crucial role in the forthcoming consolidation drive in the sector and being well positioned to capitalize on the same, we believe that the valuations of the bank will prove to be attractive in the longer term.

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