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SBI: Benign tax and write backs - Views on News from Equitymaster
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SBI: Benign tax and write backs
Jul 28, 2007

Performance summary
  • Interest income grows by 29% YoY on the back of 29% YoY growth in advances.

  • Other income falls by 52% YoY.

  • Net interest margins stable at 3.3%

  • Cost to income ratio rises from 50% in 1QFY07 to 56% in 1QFY08.

  • Provisions fall by 88% YoY.

  • Net profit up 79% YoY in 1QFY08 due to 13% drop in effective tax rate.

Rs (m) 1QFY07 1QFY08 Change
Interest Income 88,362 113,865 28.9%
Interest Expense 49,521 68,891 39.1%
Net Interest Income 38,841 44,974 15.8%
NIM (%) 3.4%  3.3%   
Other Income 17,626 8,426 -52.2%
Other Expense 28,102 29,785 6.0%
Provisions and contingencies 12,820 1,594 -87.6%
Profit before tax 15,545 22,021 41.7%
Tax 7,559 7,763 2.7%
Profit after tax/ (loss) 7,986 14,258 78.5%
Net profit margin (%) 7.0% 16.1%  
No. of shares (m) 526.3 526.3  
Book value per share (Rs)*   589.6  
P/BV (x)   2.5  
* Book value as on 30th June 2007

The country’s largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 5 trillion (Rs 5,000 bn). Although the bank's loan book is largely skewed towards corporate (68% of total advances in FY07), the retail side is also fast catching up. The bank has been a major beneficiary of the current upturn in investment cycle and has continued to witness substantial growth in both retail and corporate segments. It is also an active trader in forex and is the leader in cash management services. SBI has a network of over 9,373 branches and 7,124 ATMs across the country. 90% of the bank’s branches are on CBS platform at the end of 1QFY08.

What has driven performance in 1QFY08?
Advances – Aligned towards corporates: The country’s largest banking entity continued making an appreciable effort to stall the loss of market share in advances (16%) and deposits (15%), which has been falling sequentially over the past few years, in this quarter. Resultantly, while the bank’s advance growth (29% YoY) was higher than the sector average, in line with most of its peers, the bank chose to concentrate on the mid corporate and agricultural sector. The bank’s franchise of over 9,300 branches, 90 m customers and relationships with 80% of the large and 50% of the mid-sized corporates has helped it grow its balance sheet by Rs 727 bn in FY07 (the balance sheet size of UTI Bank at the end of FY07).

While concentration towards large and mid corporates has been drawn by risk averseness and high yields respectively, the agricultural loans were a result of the government directives towards priority sector lending. Home loans comprising over 44% of the bank’s retail advance book grew 18% YoY in 1QFY08. The bank’s well-penetrated franchise also helped it grow the agricultural advances at 30% YoY.

Corporate led growth…
(Rs m) 1QFY07 % of total 1QFY08 % of total Change
Advances 2,669,630   3,440,870   28.9%
Agriculture 283,560 10.6% 369,220 10.7% 30.2%
Retail 762,374 28.6% 887,744 25.8% 16.4%
Mid corporates 649,310 24.3% 873,981 25.4% 34.6%
Large corporates 974,386 36.5% 1,309,925 38.1% 34.4%
Deposits 3,777,420   4,496,600   19.0%
CASA 1,611,825 42.7% 1,846,304 41.1% 14.5%
Term deposits 2,165,595 57.3% 2,650,296 58.9% 22.4%
Credit/Deposit 70.7%   76.5%    

As compared to the bank’s performance on the advances front, the deposit growth was muted. As at the end of June 2007, SBI’s deposits grew by 19% YoY, lower than the sector average. The cost of deposits increased from 4.6% in June 2006 to 5.4% in June 2007. This was due to the bank’s successive increases in deposit rates in 2006 and 2007. However, the bank’s CASA (current account savings account) ratio dropped from 42.7% in 1QFY07 to 41.1% in 1QFY08. While the net interest margins have declined by 10 basis points over that of 1QFY07, the same have remained stable over that in March 2007.

Other income dampener: SBI’s other income dropped by 52% YoY in 1QFY08. Yield on investments (including CRR) decreased to 6.2% in 1QFY08 from 7.2% in 1QFY08. However, the bank’s non-interest income grew by 18.7% YoY. Despite the 16% YoY growth in fee income, the fall in the bank’s other income considerably dented its margins. Nonetheless, the write backs of provisions to the tune of Rs 3.7 bn on account of the investments in the AFS (available for sale) category (due to softening of yields in GSecs) have offered a major boost to the bank’s bottomline.

Lower employee costs filter in: SBI’s staff costs registered a contraction of nearly 5% (as percentage of total income) during FY07. The staff costs have grown marginally (5.3% YoY in 1QFY08). Having said that, the cost to income ratio increased from 50% in 1QFY07 to 55% in 1QFY08. While nearly 7,000 employees exited the bank under an exit policy in FY07, around 6,000 employees are expected to retire annually for the next couple of years. We expect the same to reduce further going forward as 38,000 employees retire from the bank’s payrolls by 2010. The new recruitments of the bank are merely 15% of the total number of employees retiring every year.

NPAs - No surprises: SBI reported no negative surprises on the NPAs side with both gross and net NPAs reducing to 3.1% and 1.6% of advances respectively in 1QFY08, from 3.6% and 1.8% respectively in 1QFY07. However, the NPA provision coverage ratio of the bank has marginally come down to 48.8% in 1QFY08 from 50.3% in 1QFY07.

Capital raising and group restructuring in the offing: The bank plans to raise Rs 150 bn within the current financial year to bolster capital and meet the growing credit demand. This may be by way of debt or equity or a combination of the two. The bank expects its CAR (13.1% in 1QFY08) to be impacted by 80 basis points due to Basel II compliance. The promoter stake (59%) in the bank has been sold by the RBI to the government.

SBI is planning to foray into general insurance and has shortlisted two to three foreign players in the segment. The bank is also planning to get into pension funds management through either SBI Life or SBI Mutual Fund. Entry into the financial planning and wealth management segments is also on the cards. Going forward, the bank is planning to set up an NBFC that would be a holding company for all its non-banking businesses and would be listed separately.

What to expect?
At the current price of Rs 1,592, the stock is trading at 1.4 times our estimated FY10 standalone adjusted book value. The lower effective tax rate is expected to sustain going forward. While we anticipate lower growth and muted margins in the near term, the bank, given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term.

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