VRS hits SBI's FY01 profits - Views on News from Equitymaster

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VRS hits SBI's FY01 profits

Jun 21, 2001

SBI has taken a hit in its profits by charging VRS expenses to the tune of Rs 8.8 bn in FY01. The bank's profits excluding VRS however jumped by 22%, in line with our expectations.

(Rs m)FY00FY01Change4QFY004QFY01Change
Interest Income 222,009 260,034 17.1% 60,758 74,446 22.5%
Other Income 35,693 40,178 12.6% 11,322 14,782 30.6%
Interest Expenditure 152,726 177,556 16.3% 38,184 50,390 32.0%
Operating Profit (EBDIT) 69,284 82,478 19.0% 22,574 24,056 6.6%
Operating Profit Margin (%)31.2%31.7% 37.2%32.3% 
Other Expenditure 62,952 74,156 17.8% 19,008 24,319 27.9%
Profit before Tax42,02548,50015.4%14,88814,518-2.5%
Provisions & Contingencies 11,725 13,91218.7% 718 -1,588 
Tax 9,785 9,714-0.7% 4,684 4,107-12.3%
Profit after Tax/(Loss) 20,516 24,874 21.2% 9,486 12,000 26.5%
Provision for VRS - 8,832 -   8,832 -
Net Profit 20,516 16,043 -21.8% 9,486 3,168 -66.6%
Net profit margin (%)9.2%9.6% 15.6%16.1% 
No. of Shares (eoy) 526 526   526 526  
Diluted Earnings per share*39.030.5 72.124.1 
P/E (at current price) 7.5  9.5 

SBI's topline grew by an impressive 23% in the fourth quarter of the year. However margins were depressed and operating expenses increased sharply. A 480 basis points drop in operating margins in 4QFY01 could be attributed to the inability of the bank to sustain yield on advances after a cut in deposit rates.

The cost to income ratio of the bank was also higher at 63% in 4QFY01 (56% in 4QFY00). But if we were to exclude an amount of Rs 4.4 bn written off towards the one-time issue expenses of India Millennium Deposits (to be redeemed at the end of five years, in 2005-06), the ratio declined to 57% in FY01 from 60% in FY00.

During the year SBI implemented a VRS plan to cut its operating costs and improve efficiency levels. The total cost of the scheme to the bank was Rs 23 bn. In FY01 the bank has made a provision of Rs 8.8 bn and plans to write off the balance expenditure equally over a period of four years.

SBI is moving towards the right direction by implementing the VRS, foraying into retail, technology upgradation plan and entering into the insurance business. In future it will be however difficult for the bank to operate at high margins considering the increasing competition and improving quality of services provided by other banks. Also, the bank will have to provide a higher amount as provisions for non performing assets, if the economic and industrial activity witnesses further downtrend.

At the current market price of Rs 228 SBI is trading at a P/E of 8x and Price/Book value ratio of 0.9x FY01 earnings.

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