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SBI: Outperforming peers

Jun 30, 2003

SBI, the countryís largest bank, announced its FY03 results on 19th June 2003. While there is not much to comment upon when one tries to analyse the results on the basis of the income statement provided, there is more to the performance as indicated in the bankís analyst meet. A look at the key takeaways of SBIís analyst meet, and the implications it has on the fundamentals of the bank going forward.SBIís topline performance was rather lacklustre. However, while topline grew by 4%, the bottomline grew by a significant 28%. SBI's strong bottomline performance for FY03 was led by improvement in net interest income, strong growth in other income and marginal improvement in operating margins. SBIís performance in 4QFY03 saw an encouraging 18% rise in the net interest income.

% of total advances
FY02FY03YoY Growth
Wholesale85.3%82.3%10.0%
Retail14.7%17.7%37.5%

Despite the lacklustre growth in topline, SBI has done well to grow its advances by 14% in FY03, which is higher than the industry average of 12%. This is also significant considering the fact that its peers like BOB, OBC and Corporation Bank have under performed the industry credit growth figures. SBIís growth in advances has been mainly led by a healthy growth (38%) in retail advances (18% of total advances in FY03). Among retail advances, housing loans have been the major growth driver recording a growth of 48% in FY03. This growth is significant considering SBIís large base.

Despite the noticeable rise in advances the bank has not been able to record a healthy growth in interest income. If one were to look at the growth in interest income we observe that the growth for FY03 has only been marginal. This is mainly due to a significant fall in yield on advances. Yield on advances has fallen to 8.97% from 9.66% in FY03. However, due to a slower relative fall in cost of deposits, the interest income from advances has recorded a marginal 1.5% growth in FY03. Income form investments have on the other hand, shown a comparatively better growth rate of 7%. This indicates that the bank has witnessed a slower relative fall (10.06% to 9.54%) in yield on investments.

At the net interest income level, the bank has seen strong improvement in the same in the March quarter. for FY03 also net interest income has improved by 10%. Net interest margins (NIM) have consequently improved marginally to 2.95% from 2.91% last year. Going forward as the incremental deposits are being contracted at very low rates, we may see further, although marginal improvement in the NIM. The redemption of the Resurgent India Binds will see further fall in cost of borrowings as these bonds were contracted at interest rates higher than current market rates.

On the operational front, the bank has done well to improve its operating margins in FY03. But for certain extraordinary expenses in the March quarter, the improvement in operating margins of SBI would have been even better. In the March quarter, the bank incurred an extraordinary one-time expense of Rs 2.6 bn towards pension liabilities. Going forward we believe that with better integration of technology, one may witness further improvement in operating margins. Moreover, the bank expects a natural attrition of close to 34,000 employees in the next 3 to 5 years.

While the bank has done reasonably well on operational front, NPAs continue to remain a cause of concern. While NPAs have fallen on a gross as well as a net level, this was achieved mainly on account of an aggressive write off of Rs 40 bn. In FY03, the bank actually saw a 30% rise in gross NPAs. Net NPAs to net advances ratio stood at 4.5% in FY03. The NPA levels are expected to increase by another 1% on account of change in NPA recognition standards from 180 days to 90 days. Thus the fact that the bank is not able to show fall in NPAs on incremental lending, coupled with change in NPA recognition norms indicates that NPA concerns are unlikely to go away anytime soon.

Having discussed what the performance of the bank has been in FY03, we now take a look at the prospects of the bank going forward. In terms of credit growth, the countryís largest bank has exhibited that despite its size it is in a position to grow its assets both retail as well as wholesale. As the bank leverages more on technology we are likely to see an improvement in the ability of the bank to service its clients and consequently record a sustained (FY03 levels) growth in advances.

The bank has done well on the operational front too. With strong technological focus as well as natural employee attrition going forward we are likely to see strong improvement in operational efficiencies. We believe that with increased reliance on technology there could be scope for another round of VRS. While NPAs continue to remain a cause of concern, we believe that the bank will be one of the foremost beneficiaries of the Securitisation Act. Also, the bank still has a significant amount of unrealized gains. Both these will to a large certain extent help SBI in controlling its NPAs in the long-term.

The stock is trading at an adjusted price to book ratio of 1.7x its FY03 earnings. While the valuations seem a bit high due to the NPA levels we believe that going forward, considering that the bank has exhibited resilience in terms of business growth compared to its peers, the stock is likely to see strength going forward.

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