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SBI: Provisioning fever

Jul 24, 2003

SBI, the banking sector behemoth, has reported a 20% growth in its bottomline on the back of a marginal 3% rise in topline for the June quarter. SBI's strong bottomline performance for 1QFY04 was primarily on account of improvement in its operating margins and strong growth in other income. The bank has also significantly increased its provisioning in the June quarter, which led to some curtailment in the bottomline growth.

(Rs m)1QFY031QFY04Change
Income from Operations 75,359 77,804 3.2%
Other Income 10,345 17,484 69.0%
Interest Expenses 51,202 50,712 -1.0%
Net interest income 24,157 27,092 12.1%
Other Expenses 17,342 18,753 8.1%
Operating Profit 6,815 8,339 22.4%
Operating Profit Margin (%)9.0%10.7% 
Provisions and Contingencies 4,778 8,16670.9%
Profit before Tax 12,382 17,657 42.6%
Tax 4,750 8,52279.4%
Profit after Tax/(Loss) 7,632 9,135 19.7%
Net Profit Margin (%)10.1%11.7% 
No. of Shares (m) 526.3 526.3  
Diluted Earnings per share*58.069.4 
P/E Ratio 5.8 

Growth in interest income (topline) has been mainly due to a strong growth in the interest income on investments in the June quarter. Whereas interest income from advances has shown only a marginal improvement in the same period, indicating that the bank may be facing a slowdown in advances due to competition. Private sector banks are fast capturing market share of PSU banks in the wholesale (corporate) lending segment.

SBI has reported a 12% rise in net interest income in 1QFY04, which can be attributed to the slower growth of interest expenses. The bank has been able to take advantage of the falling interest rates to reduce its interest outgo. SBI has also been able to improve its operating margins. Employee expenses seem to have been brought under control and margins are likely to improve further once the VRS expenses are completely written off.

The bank has significantly increased its provisioning in 1QFY04. This is primarily done in order to improve asset quality, which has had a poor track record. SBI's net NPAs to advances ratio stood at 4.5% in FY03, however we expect it to come down significantly in FY04 due to aggressive provisioning. We expect NPAs to settle at 3.6% of advances by FY04. Aggressive provisioning has, however, abated the bottomline growth of the bank in the June quarter. However, a strong growth in other income has helped it in improving the bottomline performance. Other income growth is expected to be mainly due to profits realised from the bank's G-Sec portfolio.

At Rs 400, the stock is trading at a P/E multiple of 6x its annualised 1QFY04 earnings. The adjusted price to book value (based on net NPAs in FY03) stands at 2 times, which seems on the higher side for a PSU banking stock. Slow credit offtake from the industrial sector has the potential to adversely affect the bank's loan portfolio. Also, competitors are more aggressive and proactive, which could affect SBI's retail asset growth in the future.

Having said that, we continue to remain bullish on the long term prospects of the bank considering its drive to technologically integrate all its branches, which will lead to improvement in efficiencies further. The only concern at this stage is the frequent change in management at the top and the uncertainty it brings along with it.

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