SBIís 80% jump in profits in the fourth quarter look commendable. Its full year profits also jumped by over 50%. However, if one were to look deeper into the results, it is not that impressive. The bankís domestic advances were up by a modest 8% and non-interest income growth was subdued at 7.5% (much below targeted 20%). The bank is feeling the heat of competition.
During FY02, SBIís total advances portfolio inched up by just 6%. This growth rate was much lower than the industry growth rate of 12%. The bankís large exposure to the industrial sector, 50% of gross advances, impacted growth rate in FY02. However, the bank has given upbeat outlook for the credit offtake in the current year at 16%. This could be achieved through expected recovery in industrial demand and revival in commodity prices. To push up the credit demand, the bank has started lending aggressively at sub PLR rates. Most of its top corporate clients are borrowing at sub PLR rates (2.3% of domestic advances in FY02).
In retail segment too, SBI has made an entry with a vengeance. Its personal finance portfolio increased by a robust 33% to Rs 177 bn in FY02 (accounting for 15% of total advances). In retail finance, housing loans nearly doubled in FY02, forming 33% of total retail loans. The bank aims to grow its housing portfolio by over 75% in the current fiscal. SBI is one of the largest players in the housing finance market, with a share of about 14%. With bias towards softer interest rates and tax benefits for investments in housing loans, the bank is likely to achieve its target. The bank aims to achieve nearly 40% growth in personal finance loans in the current fiscal.
Apart from core banking revenues, SBIís non-fund based income also witnessed pressure in FY02. SBIís profits from sale of investments were up by just 3%, as against an exponential rise recorded by other banks in the sector. This could be due to the reason that the bank opted to hold its long-term maturity portfolio instead of booking profits when bond prices appreciated. As on March 2002, the bankís average yield on investment portfolio was 10.6% while incremental yield on investments is at 8%. The bank aims to liquidate some part of its long maturity investment portfolio in the current year, which is likely to fuel its other income growth.
Bank revenues from commission also witnessed a dismal growth rate of 7.5%. SBI is a leading player in the cash management business with volumes of Rs 1.8 trillion in FY02. In order to maintain growth in this revenue segment, the bank is offering competitive rates (lowering margins and leveraging on volumes). Its forex income grew strongly by 34% after having recorded a decline of 8% in the previous year. SBI aims to achieve 20% growth in its fee-based income in the current year.
Snapshot of fee based income
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SBI continued the process of cleaning up its books by increasing provision for non-performing assets (NPAs). In FY02, the bank provided Rs 20 bn, as provision for NPAs, which has helped in bringing down its net NPA ratio to 5.6% from 6.4% in FY01. Credit to the industrial sector turned sticky during the year on the back of a slowdown in industrial activity. SBIís gross NPA ratio came down marginally to 12%. In value terms, gross NPAs of the bank actually declined by 2.5% to Rs 155 bn due to its aggressive write offs. The amount written off by the bank was Rs 24 bn while the recovery was at Rs 21 bn.
SBIís VRS efforts paid off in FY02, which is reflected in its lower cost to income ratio at 54% (61% in FY01). The bank aims to bring down the ratio further to 50% in the current fiscal by improving productivity and leveraging on technology. The bank is not planning to go for second VRS, as it expects reduction of 10-15% of staff by natural attrition in the next 4-5 years. The bank has appointed TCS for implementing the core banking solutions. SBI has already computerized 80% of its business and aims to implement core-banking solution in 500 branches by October '02. It has set up 1,070 ATMs across the country. However, the discouraging part is that only half of them are interconnected.
Revenues/employee (Rs m)
Net profits/employee (Rs m)
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Adjst. Price/Book value (x)
SBI is currently trading at an adjusted price to book value ratio of 1.5x, which is higher compared to its peers in the industry. Also, considering its earnings growth it looks fairly valued. However, if it adopts technology rapidly then it can have better opportunities to grow, considering its size and widespread network. Its valuations could get re-rated.
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