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SBI: 'Extraordinary' gains

Aug 2, 2005

Performance summary:
SBI, the country's largest bank, continued to deliver stellar performance during the first quarter of this fiscal, although this time it was aided by extraordinary (one time) gains. While the bank's performance remains strong in terms of asset growth and margins, income tax refunds, divestment of stake in subsidiaries and constrained overheads have helped the bank post a 16% YoY growth in bottomline for 1QFY06.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 76,665 91,662 19.6%
Other Income 15,387 15765 2.5%
Interest Expense 47,125 49,130 4.3%
Net Interest Income 29,540 42,532 44.0%
Other Expense 24,213 23,903 -1.3%
Operating profit / (loss) 5,327 18,629 249.7%
Operating profit margin (%) 6.9% 20.3%
Provisions and contingencies 3,286 17,665 437.6%
Profit before tax 17,428 16,729 -4.0%
Tax 6,844 4,501 -34.2%
Profit after tax/ (loss) 10,584 12,228 15.5%
Net profit margin (%) 11.5% 15.9%  
No. of shares (m) 526.3 526.3  
Diluted earnings per share (Rs)* 80.4 92.9  
P/E (x)   8.6  
* (annualised)      

The country's largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 4 trillion. Although the bank's loan book is largely skewed towards corporate (63% of non-food advances), 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 a 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 9,000 branches and 5,000 ATMs across the country.

What has driven performance in 1QFY06?
Spiraling NII: The pick up in credit cycle continued to augur well for the bank's advance portfolio that grew by 33% YoY. Of this, the retail segment grew by 7% YoY, while the corporate book posted a YoY growth of 40% to comprise 81% of the bank's credit book. It is pertinent to note that against the earlier trend of the retail book being the major growth driver, it is the growth in corporate segment that has picked up pace over the past few months. Housing loans comprised 55% of the bank's retail book at the end of 1QFY06. Also, while the 14% YoY growth in deposits has helped bring down the deposit costs from 5.4% in 1QFY05 to 4.8% in 1QFY06, the yield on advances have been maintained at 3%. This has helped marginally raise the NIMs from 3% in 1QFY05 to 3.1% in 1QFY06. However, the income tax refunds of Rs 35.4 bn during 1QFY06 (which the bank has accounted for as interest earned) has helped the net interest income (NII) grow by an unexpected 44% YoY. Considering this one time item, the NIMs have spiraled to 3.8%.

1QFY05 % of total 1QFY06 % of total Change
Advances 1,663,870   2,205,230   32.5%
Retail 382,690 23.0% 410,400 18.6% 7.2%
Corporate 1,281,180 77.0% 1,794,830 81.4% 40.1%
Deposits 3,306,480   3,761,410   13.8%

Fee continues to stagnate: While the bank's other income increased by 2.5% YoY, other income excluding profit on sale investment and dividend increased by 7.9%. Of this, the growth in bank's fee income continues to stagnate at 14% YoY. Also, the bank sold 23% stake in Credit Information Bureau (India) Ltd (CIBIL) in 1QFY06 (remaining stake 16%), the profit on which has not been divulged.

Overheads and delinquencies arrested: Although the bank's operating overheads have witnessed a marginal decline of 1.3% YoY, the cost to income ratio has fallen to 41% from 48% at the end of 1QFY05. This was due to employee costs registering a decline of 3.6% with savings of Rs 880 m on VRS amortization in the current quarter (the same having been fully amortised by FY05). However, the bank has been very proactive in terms of provisioning, which coupled with lower delinquencies has helped reduce the net NPA to advance ratio to 2.4% in 1QFY06. (3.5% in 1QFY05). Also, we reckon that a large part of this provisioning has been towards amortisation of losses on G Secs, which the bank has transferred to the HTM (held to maturity) basket during 1QFY06.

1QFY06 (%) SBI SBI Group
ROA 1.0 0.8
NIM 3.8 3.8
Cost to income 41.0 44.9
Net NPA/advances 2.4 2.1
CAR 11.6 13.1
Adj. Book value 470 531
Group performance steady: The performance of the consolidated entity (SBI group) also remains steady and infact has outperformed SBI (standalone) on several parameters such as NIM (3.8%), Net NPAs (2.1% of advances) and CAR (13%). More importantly, the valuations of the consolidated entity continue to be more attractive than that of SBI standalone.

What to expect?
During 1QFY06, SBI acquired 51% equity in Indian Ocean International Bank Limited (IOIB), Mauritius. The bank further plans to acquire two larger banks in Asia and Africa in this fiscal for which it has envisaged additional tier II borrowings. The additional borrowing also seems inevitable given the fact that that SBI does not have sufficient capital to aid its growth (CAR 11.6% in 1QFY06) and with the redemption of IMDs (India Millennium Deposits) in FY06, it is going to face severe funding constraints. However, the bank now stands better hedged against treasury losses due to rising interest rates with 45% of its investments being in the HTM category.

At the current price of Rs 800, the bank is trading 1.8 times FY05 adjusted book value and 1.4 times our estimated FY07 adjusted book value. We had given a HOLD on the bank in April 2005. Although the current valuations are relatively stretched, we continue to believe that given the value of the consolidated entity (which will unlock once the associate banks are merged with it over the next couple of years), the bank remains a good stock to remain invested in from a longer-term perspective.

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