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SBI: Write-backs sweeten performance - Views on News from Equitymaster
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SBI: Write-backs sweeten performance
Jul 30, 2009

Performance summary
  • Interest income grows by 27% YoY in 1QFY10 on the back of 23% YoY growth in advances.
  • Other income grows by 49% YoY in 1QFY10 due to spurt in forex and fee income from large corporate.
  • Write back of investment depreciation of 12 bn aids profitability.
  • Cost to income ratio rises to 57% in 1QFY10 from 45% in 1QFY09due to wage and pension provisions.
  • Capital adequacy ratio at 14.1% at the end of 1QFY10; net NPAs fall to 1.6% of advances, from 1.8% at the end of FY09.


Standalone numbers
Rs (m) 1QFY09 1QFY10 Change
Interest income 137,992 174,728 26.6%
Interest Expense 89,815 124,478 38.6%
Net Interest Income 48,177 50,250 4.3%
Net interest margin (%) 3.0% 2.7%  
Other Income 24,038 35,687 48.5%
Other Expense 32,592 49,197 50.9%
Provisions and contingencies 15,496 1,727 -88.9%
Profit before tax 24,127 35,013 45.1%
Tax 7,720 11,708 51.7%
Profit after tax/ (loss) 16,407 23,305 42.0%
Net profit margin (%) 11.9% 13.3%  
No. of shares (m)   634.9  
Book value per share (Rs)*   912.7  
P/BV (x)   1.9  
* Book value as on 31st March 2009

What has driven performance in 1QFY10?
  • Led by a nearly 24% YoY growth in home loans and 29% YoY growth in auto loans, SBI became the fastest growing home loan provider and auto financer in this quarter, thanks to its aggressive pricing of these products. On the back of its large CASA base, the bank managed to grow its advances by 23% YoY in 1QFY10, thereby showing resilience in the face of overall economic turmoil. The overall growth in advances was led by the bankís retail and large corporate portfolio. SBIís market share in advances and deposits stood at 16.5% and 17.6% respectively at the end of June 2009 from 15.7% and 15.2% respectively at the end of June 2008. The overall growth in advances was lower than in deposits, particularly due to lower growth in disbursements to agri-credit segment. Also a relatively lower CASA proportion affected the bankís NIMs that dropped by 0.3% YoY.

    Balanced growthÖ
    (Rs m) 1QFY09 % of total 1QFY10 % of total Change
    Advances 4,477,470   5,497,930   22.8%
    Agriculture & SME 1,432,524 32.0% 1,731,605 31.5% 20.9%
    Retail 921,172 20.6% 1,128,620 20.5% 22.5%
    Mid corporates 1,035,120 23.1% 1,190,390 21.7% 15.0%
    Large corporates 493,150 11.0% 673,160 12.2% 36.5%
    International 595,504 13.3% 774,155 14.1% 30.0%
               
    Total deposits 5,618,570   7,635,630   35.9%
    CASA 2,352,495 41.9% 2,935,900 38.5% 24.8%
    Term deposits 3,266,075 58.1% 4,699,730 61.6% 43.9%
    Credit /Deposit 79.7%   72.0%    

  • SBIís other income grew by a substantial 49% YoY during 1QFY10. This was largely on account of a 45% YoY growth in its fee income (69% of total other income), which was led by higher commissions, brokerage, and loan processing fees. The growth in other income was also aided by forex income that grew by a whopping 178% YoY.

  • SBIís cost to income ratio rose to 57% in FY09 from 45% in 1QFY09. This ratio would have been lower but for the higher provisioning of Rs 12 bn that the bank had to make for wage revision and pensions. It added around 33,700 new employees in FY09 which also increased its operating costs during the fiscal.

  • SBIís net NPAs stood at 1.6% at the end of June 2009 as compared to 1.8% at the end of March 2009. The bank has restructured loans worth Rs 81 bn in 1QFY10 and had applications worth Rs 110 bn pending at the end of June 2009. For FY10, the bank foresees potential NPAs arising in the real estate and SME sectors. The management has indicated that a large part of the rise in domestic NPAs was on account of the loan to Ratnagiri Gas and Power and the bad loans taken over from State Bank of Saurashtra.

What to expect?
At the current price of Rs 1,796, the stock is trading at a multiple of 1.5 times our estimated FY11 standalone adjusted book value. SBIís management has indicated that the bank will raise capital in FY10 to prop up its capital adequacy, as it is targeting a loan growth of 25% for the fiscal. The government has recently indicated that it may dilute its stake in SBI from 59% to 55%. Also, the bankís management expects net profits to grow by 40% YoY during FY10 and net interest margin to be at 3%.

While we do not see SBIís current growth rates being sustainable in the near term, the bank will certainly continue to draw advantage of its large low cost deposit base (CASA) and extended franchise. In addition, fee income from government business and large corporate will also work to its advantage. Nevertheless, the bank needs to remain more conservative on its investment provisioning. While we maintain our view on the stock from a 2 to 3 years perspective, the current valuations of the stock warrant some caution.

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