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SBI: Lower provisioning saves day

Jul 27, 2004

Introduction to results
SBI, the public sector banking giant, has reported a mixed performance for the June quarter. For 1QFY05, while the bank's topline has declined YoY by 1.5%, bottomline has witnessed a YoY growth of nearly 16%. Improvement in net interest income and a significant fall in provisioning has helped SBI to post a growth in net profit in the March quarter. Operating expenses have registered a strong rise in the June quarter continuing the trend seen in the previous quarters. This has led to a strong fall in operating margins, despite significant rise in net interest income.

(Rs m) 1QFY04 1QFY05 Change
Income from operations 77,702 76,666 -1.7%
Other income 17,529 15,387 -10.9%
Interest expenses 50,856 47,125 -7.8%
Net interest income 26,847 29,539 10.0%
Other expenses 19,107 24,214 26.7%
Operating profit 7,740 5,327 -31.2%
Operating profit margin (%) 9.9% 6.9%  
Provisions and contingencies 7,916 3,287 -57.1%
Profit before tax 17,354 17,426 0.4%
Tax 8,350 6,843 -18.0%
Profit after tax/(loss) 9,004 10,582 17.5%
Net profit margin (%) 11.5% 13.8%  
No. of shares (m) 526.3 526.3  
Diluted earnings per share* 68.4 80.4  
P/E ratio   5.6  
*(annualised)      

What is the company's business?
State Bank of India (SBI) is India's largest financial entity with asset size of over Rs 3 trillion. The bank with its wide network has diversified business interest including project finance, personal finance, housing finance, mutual funds, investment banking and insurance apart from traditional corporate lending. The bank is also an active trader in forex and is the leader in cash management services.

What has driven the performance in 1QFY05?
Sales:There are some encouraging signs on the core business front. the bank has reported a better (than FY04) growth in its advances (17% YoY) mainly led by a strong growth in retail assets (37% YoY). This has to an extent limited the fall in its topline. The fall in topline has been mainly due to the fall in interest income from investments. While the yields on investments have fallen to 8% (from 9% last year), the fall in yields on advances have shown a relatively smaller decline to 7.8% (from 8.6% last year). While the retail segment has grown by an encouraging 37%, the overall advances growth (12% YoY) has been disappointing.

Operating margins:Net interest income continues to witness healthy growth for SBI. The reason for this is that cost of deposits has witnessed a reduction from 5.8% in 1QFY04 to 5% in 1QFY05. SBI has managed to maintain its net interest margins (NIM) at 2.9%. while the bank continues to progressively reduce its interest expenses, its operating expenses have been rising strongly and have taken a toll on its operating margins. The bank has attributed higher depreciation, rent, taxes, repairs and staff cost to this rise in operating expenses. SBI's efforts towards technology implementation and expansion of ATM network is likely to keep other operating expenses high.

Net Profits:SBI has significantly reduced its provisioning for NPAs in the June quarter. The bank has stated that it had made provisioning larger than that mandated by the RBI in 1QFY04 and in 1QFY05 it has not made the same level of provisioning, hence the drop in the same. SBI's net NPAs to net advances ratio stands reduced marginally at 3.5% in 1QFY05, from 4.8% in 1QFY04. lower provisioning has aided the growth in the bottomline. The fall in other income has to an extent mitigated this improvement. Other income for SBI fell by 12% due to a steep fall in its profits from sale of investments (from Rs 8.15 bn in 1QFY04 to Rs 1.5 bn in 1QFY05), however despite this the fall in other income has been limited due to healthy improvement in other fee based income.

What to expect?
At Rs 451, the stock trades at a P/E multiple of 5.6x its annualised 1QFY05 earnings. Overall, SBI's performance has been slipping since the March quarter and the stock markets have not taken kindly to the same. Keeping a long-term picture in mind, SBI is well placed to capitalise on the Indian growth story, but competition seems to be gaining ground. This is reflected by the lackluster growth in advances, when the sector itself grew by nearly 15%. Asset quality has improved but there is still some amount of clean up still left to be done. The next few quarters are crucial from the point of view of managing asset growth. If SBI is not able to manage the same, then there may be a further re-rating of the scrip.

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