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SBI: Research meet excerpts - Views on News from Equitymaster

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SBI: Research meet excerpts

Aug 29, 2006

We had recently met with the management of State Bank of India to discuss the dynamics of the banking sector, the bank’s performance and its growth prospects going forward. Following are the key takeaways from the meeting. Capital raising options: SBI estimates the additional capital requirement for meeting the Basel II norms by 1QFY08 to be 90 to 100 basis points higher than its current CAR (capital adequacy ratio – 11.9% in 1QFY07). The options for raising this capital arises by way of rising Tier I hybrid capital or diluting equity besides raising Tier II bonds. According to the bank, the cost of raising hybrid capital is 9.0% to 9.8% per annum, which is higher than the cost of term deposits. The recent amendment to the SBI Act, which enables the RBI to transfer its shares in the bank (59% stake) to the government and provides for dilution of government stake upto 51%, also facilitates capital raising options.

Interest rate and margin outlook: The bank sees the interest rates remaining stable in the medium term with the liquidity concerns showing signs of easing out. However, the managemnet has also acknowledged that there is typically 3 to 4 months’ lag between the rise in funding cost and passing on of the same to customers. Also, given that nearly 50% of the bank’s loan book is sub-PLR, the pressure on margins weigh heavy on its books. It therefore envisages the net interest margins to be under pressure in the interim and stabilise thereon. However, since the bank has a healthy 41% of its deposits in low cost deposit (CASA) segment, we have estimated only a 50 basis points contraction in NIMs until FY09 from 3.4% (1QFY07). It must, however, be noted that the bank’s internal NIM target for FY07 is 3.1% and in the event of a slippage in NIMs at a faster clip, we shall have to downgrade our estimations further.

Retail and SME focus: SBI currently has 17.4% share of the total credit disbursement in the banking industry (food and non food credit). The retail, agri credit and SME segments were the largest contributors (63% of total loan growth) to the bank’s incremental credit growth at the end of FY06. Of this, while the bank expects the retail segment to grow by 22% YoY, the SME segment is expected to grow at the rate of 25% to 30% YoY.

Treasury risks on the block: Since the bank continues to have a considerable proportion of GSecs in the AFS basket (available for sale - approximately 57%), risks on the treasury side cannot be sidelined. The change in the computation of commission on government business (from value to volume based) has led to fall in fee income from the same by 13% YoY. While government business (collection of taxes) comprises 12% of SBI’s other income, total fee income comprise 17% of the bank’s total income.

International business: The bank derived around 7% of its net interest income and 5% of its profits from international operations in FY06. It had embarked upon inorganic growth initiatives in FY06, wherein its acquired stakes in 3 overseas banks, one each in Mauritius, Kenya and Indonesia. The bank had also cited that it will continue to pursue the inorganic growth route in the overseas markets to grow it international business (which stood at US$ 9 m in FY06) and the benefits of that will filter in, in the long term. It is targeting a contribution of 15% to 20% of profits from its international operations by FY08.

Subsidiaries and associate banks: SBI’s associate banks enjoy better financials than the bank itself (on a standalone basis) in terms of margins and asset quality. Its subsidiary, SBI Life, was the first life insurance company in the country to post a positive bottomline in FY06. Also, the associate banks are considerably accretive to the bank’s book value and franchise. The seven associate banks together have almost the same number of branches as SBI does. However, the bank’s management does not see the merger of the associate banks with SBI plausible in the medium term. We, therefore, continue to value SBI on a standalone basis rather than taking the consolidated valuations.

FY06 (%) SBI SBI Group
ROA 1.0 0.9
RONW 18.1 15.5
Cost / Income 47.8 50.9
Net NPA 2.7 1.9
CAR 12.5 11.9

Benchmarks: SBI benchmarks itself against banks like Bank of America and Wells Fargo. This is because of the latters’ well knit and integrated operations and markets leadership in several lines of operations.

What to expect?
At the current price of Rs 910, the stock is trading 1.6 times our estimated FY08 adjusted book value. Although given its size, scalability and operating leverage, SBI continues to remain amongst our preferred plays for the long term, the current valuations seem to be factoring in most of the possible upsides. Also, limited growth in fee income and limited scope for passing on the rate hikes (due to PSU status and larger share of sub-PLR loans), restricts the scope for expansion in the bank’s margins. However, we believe that prudent capital raising, attention on asset quality and leveraging its international operations will stand the bank in good stead in the long term.

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Mar 19, 2019 11:45 AM