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SBI: VRS benefits

Jul 25, 2001

State Bank of India posted impressive first quarter performance with 21% jump in interest income and 26% rise in earnings. The bank's profits growth was however, trimmed by over 100% increase in tax provision.

(Rs m)1QFY011QFY02Change
Interest Income 59,231 71,414 20.6%
Other Income 8,041 9,905 23.2%
Interest Expenditure 40,504 49,956 23.3%
Operating Profit (EBDIT) 18,727 21,458 14.6%
Operating Profit Margin (%)31.6%30.0% 
Other Expenditure 15,900 15,846 -0.3%
Profit before Tax10,86815,51642.8%
Provisions & Contingencies 4,239 4,6279.2%
Tax 2,012 4,205109.0%
Profit after Tax/(Loss) 4,617 6,684 44.8%
Provision for VRS  886 -
Net Profit 4,617 5,798 25.6%
Net profit margin (%)7.8%8.1% 
No. of Shares (eoy) 526 526  
Diluted Earnings per share*35.144.1 
P/E (at current price) 4.8 
*(annualised)   

The bank's operating margins declined by 160 basis points. This could be due to more than proportionate reduction in lending rates with a fall in deposit rates. Increasing competition in the scenario of more liquidity in the markets has resulted in a dip in operating margins.

Successful implementation of the VRS plan has however, helped the bank in controlling its employee cost. This has reduced the cost to income ratio of the bank to 51% from 59% during 1QFY01. During the quarter under review, the bank provided for Rs 886 m towards VRS cost on a pro-rata basis (Rs 3.5 bn expected for full year). Profits before this provision were higher by 45% in 1QFY02.

During the quarter, the bank's tax provision increased by over 100%. This could be due to higher provision required for deferred taxes in line with the recently introduced accounting standard.

At the current market price of Rs 211 SBI is trading at a P/E of 3.3x and Price/Book value ratio of 0.7x FY02 projected earnings. The bank's capital adequacy ratio of 13.3% is above the minimum required and is likely supplement its rapid expansion plans. Also, SBI is initiating measures to reduce its NPA ratio by increasing the coverage ratio (57% as on FY01). These factors along with its thrust on retail and IT upgradation are expected to double its earnings growth in the current year.

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