SBI posted a 22% drop in profits. On first glance the figure looks rather disappointing. However, the bank is in the clean up mood: it has implemented a VRS and provided higher amount on non-performing assets.
The bankís volume growth was in line with the other public sector peers. Its advances and deposits grew by 16% and 23% respectively. Credit to deposit ratio however reduced to 45% from 48% in the previous year. While the bank has reduced its average deposit cost by 30 basis points, its yield on advances was down by a marginal 6 basis points. This has contributed in improving the interest spread of the bank by 24 basis points to 3%. The contribution of saving and current account deposits however came down to 37% from 39% in the previous year, indicating an outflow of low cost funds. The bank expects deposits rates to go down further in the current year. But it will be difficult for SBI to maintain the spread at current levels. As a result it is concentrating more on volumes and focusing on retail business.
Interestingly, SBIís investments grew by 34% in FY01, higher than the growth in advances. Income from investments also increased by 18%, more than the 17% growth recorded in income from advances. Income from investments contributed to 43.2% to total interest income and the proportion is gradually increasing. Itís worth mentioning that the bankís exposure to capital markets is miniscule Rs 3 bn, mainly from trading in secondary markets. Consequently, it has escaped from the volatility in the capital markets. However, considering the size of the bank, a relatively low exposure indicates opportunity loss of higher yield on investments.
Break-up of interest income
The bank is a leader in cash management services business with volumes of Rs 1,500 bn and 187 corporate customers. The growth in other income was however restricted due to a drop of 8% in forex income. The proportion of commission and exchange income too reduced to 66% from 72% in the previous year. This indicates that SBI is facing tough competition even in other businesses. Nevertheless, SBI aims to double the other income base in the next two years by increasing the government business.
Other income mix
Commission & exchange
Dividend from subsidiaries
Sale of investments
SBI is initiating measures to clean up its books by increasing provision for non-performing assets (NPAs). In FY01, the bank has provided Rs 14 bn as provision for NPAs, which has reduced its ratio of NPA to advances to 6% from 6.4% in the previous year. Its NPAs were mainly from government guarantee accounts (44% from priority sector). Most of the commercial credit has also turned sticky towards the year-end on the back of a slowdown in the industrial activity. During the year the bank implemented a one time recovery scheme and recovered Rs 3.8 bn from about 200 cases. It expects to recover Rs 4 bn further by the end of June Ď01. Gross NPAs of the bank currently stands at Rs 159 bn, 14% of net outstanding advances. If the economy witnesses further downtrend the bank may have to provide for more provisions in the current fiscal.
Revenues/employee (Rs m)
Net profits/employee (Rs m)
Business/employee (Rs m)
Price/Book value (x)
* FY01 figures
VRS was a further extension of a clean up measure. During the year, SBI reduced its workforce by about 23,000 by launching a VRS scheme. The scheme cost the bank Rs 23 bn (Rs 1 m per employee). The bank charged Rs 8.8 bn to profit and loss account in FY01 and plans to write off the balance amount in the next four years. Its cost to income ratio that declined to 57% in FY01 (from 60% in FY00) is expected to come down to 51% in FY02. The staff strength still stands at 210,280, from which about 50% are clerical employees. As can be seen from the table, the bankís productivity parameters are one of the lowest in the sector. Before making an adjustment for VRS expenses, the earnings are up by 21%. Accordingly P/E ratio before accounting for VRS stands at 5x, which is on a lower side. However, the savings in wage cost is expected to improve its ROE (currently at 12%) significantly in the coming years.
SBI has also drawn a detailed technology upgradation map to improve the productivity level and customer services. In the past six years the bank had already spent Rs 5 bn on it and plans to spend another Rs 5 bn in the next five years. This will be mainly for networking and core banking solutions. It has already installed 263 ATMs and plans to extend the number to 1,000 by the year-end. These ATMs are however yet to be networked. The bank is planning to implement its IT plans through its 100% IT subsidiary.
In the past three years, SBIís P/E has moved in a range of 6-12 times and Price/Book value remained at about 1x. Although the bank has plans to improve technology, foray into retail business and venture into areas like insurance, gold loans and brokerage, future valuations depend on the successful implementation of business strategies.
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