State Bank of India (SBI), India’s largest public sector bank has bettered analyst expectations and posted a 100% jump in its profits in the current year. On the face of it the performance is excellent. However if one were to analyse the results a different picture emerges.
SBI’s profits for FY99, declined by 44.8% to Rs 10.3 bn and in FY00 they have doubled to Rs 20.5 bn. Profits can be depressed – by hiking provision for bad and doubtful debts or taking a one time charge of some extra ordinary expenses (this of course assuming that the operating profitability has not altered). But SBI has opted to show spectacular results by depressing its expenses thereby showing higher profits. Consider the table below, which indicates that the bank’s profits has actually increased by only 25% and not 100%.
Particulars (Rs bn)
Net profit declared
Add: India Resurgent Bond Issue Expenses
1. Excess provision on write back of investment depreciation
2. Profits from security trading
Adjusted Net Profit
Adjusted Net Profit Growth
Although there has been an improvement of 16% in its operating income, profit margins have been under pressure. Also many ratios of the bank seems to be improved but that’s only because last year’s figures were unduly depressed. If one has to take a longer perspective the view changes.
Comparative past performance
Compared to FY99, all key ratios have improved but the ratios were comparatively higher in FY98 than in FY00. The point is the bank has improved its ratios in FY00 by depressing the results in one year and boosting them in the next.
At the current market price of Rs 224, SBI is trading at a PER of 5.8 times its FY00 earnings with a Price/Book value ratio of 1 times. The lower valuation of the bank is due to several reasons. Firstly it has a public sector tag. The management culture is thought to be bureaucratic and there is a fear of merger of the associate banks with SBI. The technology of the bank is nowhere compared to that of HDFC Bank and ICICI Bank in the age of Internet. There are also problems of unviable branches and excess workforce. If the bank is able to solve all these factors a re-rating would only be inevitable.
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