Indiaís largest public sector bank, State Bank of India (SBI) has been a brilliant performer this year. Post September 11, while the BSE Sensex has remained flat, SBIís stock has soared by 29%. Also, since the beginning of the current fiscal, the stock has gained 19%, as against a 14% fall in the Sensex.
The performance has not been driven by a general positive sentiment towards banking sector. Rather, SBIís ongoing restructuring initiatives and business aggressiveness have percolated into its financial performance and consequently its stock price. The sleeping banking giant has awakened and is likely to pose challenges for the private sector stalwarts. Starting from realigning the organization structure through VRS, the bank has taken quick steps in implementation of technology and diversifying its foray into retail finance and other related businesses including insurance. The bank with 9,085 of its own branches and 4,500 branches of its subsidiaries is catching up with its private sector peers to provide one-stop financial solutions.
With the slowdown in the corporate loan demand and deteriorating asset quality, the bank eyed the retail finance market, which offered immense growth opportunities. It has made a vengeful entry into housing finance market becoming the third largest player within a short time. Its housing loan portfolio nearly doubled in FY02, forming 33% of total retail loans. SBI aims to grow its housing loan disbursements by over 75% in the current fiscal. With bias towards softer interest rates and tax benefits for investments in housing loans, the bank is likely to achieve its target. In the overall personal finance segment, SBI has targeted to achieve 40% growth. With growing retail assets, the contribution of retail banking to total loan assets is expected to go up from 15% in FY02 to 20% in the next three years. Since default rate in retail finance is relatively low, the bankís asset quality is likely to improve. SBI has targeted to bring down its net NPAs to advances ratio to 5% in the second half of 2002-03 from 5.6% in FY02.
While the burgeoning retail financing market would support SBIís overall loan growth, expected slowdown in the industrial demand, could taper the bankís corporate credit demand. A 6% growth in advances during FY02 was the lowest in the last five years. The bank has grossly under performed the banking industryís growth rate of 12.8% in FY02. However, SBI has given upbeat outlook for the credit offtake in the current year at 16%.
To push up the credit demand, the bank has started lending aggressively at sub PLR rates (2.3% of domestic advances in FY02). It has tied-up with a string of top-rated corporates and PSUs to disburse close to Rs 100 bn in term loans over the next two months. With a significant slide in interest rates, Indian companies are leaving no stone unturned to raise cheap money. The bulk of these loans are being raised to replace existing high-cost funds. After attacking the commercial paper (CP) and non-convertible debenture (NCD) markets aggressively, top-rated corporates and PSUs have started tying up with banks to raise term loans. SBI has also started offering loan products wherein interest rates are linked to prices of government securities.
There will be about a 150 basis points mark-up over government paper of comparative maturity for triple-A rated companies. In effect, SBI is pricing five-year loans for top-rated customers at around 8.25%. Sub-PLR lending is likely to lower the bankís average yield on advances, which stood at 9.4% at the end of June quarter. On a consolidated basis, SBIís average yield on advances is expected to come down to about 9% in the next two years.
The bankís initiatives to fuel credit demand would take care of its interest income growth. However, considering its size and challenging business environment growth rates may not look impressive. We have forecasted a three-year CAGR of about 6% in the bankís net interest income on a consolidated basis.
Its non-interest income is also under pressure, projected CAGR of 8% for the next three years. It is clearly reflected from the table that the bankís commission and exchange business, which accounts for 67% of total non-interest income has witnessed just 5% CAGR in the last three years. SBI is a leading player in the cash management business with volumes of Rs 1.8 trillion in FY02. In order to maintain growth in this revenue stream, the bank is offering competitive rates (lowering margins and leveraging on volumes). Once the bank integrates technology it could give tough competition to private sector banks in this segment.
Snapshot of fee based income
* On a standalone basis for SBI
||3 yrs CAGR
|Dividend from subsidiaries
|Sale of investments
On the liability side too, the bank is placed at an advantageous position with 37% of total funds from low cost deposits. Over 70% of the bankís branches are in rural and semi urban areas, which helped it to bring down its average cost of deposits to 6.6% as on June 2002. With lower cost of funds, the bank has been able to generate higher net interest margins (NIM) of 2.9%. Competitive pressure would however, trim its NIMs in the coming years.
Technology integration is another extension of SBIís restructuring plan. The bank has already computerized 80% of its business (covering 3,000 branches) and has set up 1,070 ATMs across the country. It aims to network 49 cities and 2,500 branches in the top 100 centers by December 2002. The bank has identified the core banking solutions and it would be implemented with assistance from TCS (Tata Consultancy Services). With its large asset size of over Rs 3 trillion and customer base of 90 m, the bank is likely to overcome challenges in terms of business opportunities, once it is fully integrated.
The benefits of IT integration would also be reflected in lower operating cost. Already by implementing VRS, the bank has been able to lower its staff cost by 7% in FY02. SBI aims to bring down its cost to income ratio to below 50% in the next two years from 54% in FY02. Cost reduction will also improve its operating margins to over 7% in the next three years from 6% in FY02. The rise in margins is not significant, due to pressure on net interest income, which is negating the effect of operating efficiencies.
SBIís restructuring efforts have begun successfully. Itís only a matter of time before the restructuring efforts get fully implemented. The ability of the bank to generate returns from these areas and improve customer service will surely place it a step up on the ladder. Its earnings growth however, would not be as exciting as private sector banks due its high asset base. Nevertheless, on a consolidated basis the bank is trading at a price to book value ratio of 0.7x, after adjusting for non-performing assets.