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SBI: Leveraging its franchise - Views on News from Equitymaster

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SBI: Leveraging its franchise
Oct 27, 2008

Performance summary
  • Interest income grows by 29% YoY in 1HFY09, on the back of 38% YoY growth in advances.

  • Net interest margins improve to 3.2% due to higher proportion of CASA (current and savings account).

  • Total delinquency in international business to the tune of Rs 1.5 bn

  • Provisions increase nearly 8 fold (781% YoY) due to investment provisions, provisions for wage revision and pension fund.

  • Cost to income ratio drops sharply to 46% in 1HFY09 from 55% in 1HFY08.

  • Capital adequacy ratio at 11.5% at the end of 1HFY09; net NPAs at 1.3% (1.4% in 1QFY09).



Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest Income 116,163 155,665 34.0% 227,067 293,657 29.3%
Interest Expense 78,536 101,112 28.7% 147,425 190,927 29.5%
Net Interest Income 37,627 54,554 45.0% 79,642 102,730 29.0%
NIM (%)       3.0% 3.2%  
Other Income 20,419 23,431 14.8% 31,805 47,470 49.3%
Other Expense 30,916 36,052 16.6% 60,697 68,645 13.1%
Provisions and contingencies 857 6,106 612.5% 2,451 21,601 781.4%
Profit before tax 26,273 35,827 36.4% 48,300 59,955 24.1%
Tax 10,161 13,229 30.2% 17,929 20,950 16.8%
Profit after tax/ (loss) 16,112 22,598 40.3% 30,371 39,005 28.4%
Net profit margin (%)       10.3% 13.3%  
No. of shares (m)       526.3 634.8  
Book value per share (Rs)*         772.5  
P/BV (x)         1.3  
* (Book value as on 30th September 2008)

What has driven performance in 2QFY09?
  • Leveraging on its strength in low cost deposits (CASA) at a time when most banks are grappling with higher interest rates, SBI made an appreciable effort to increase its market share in both deposits (16.1% in 2QFY09) and advances (16.0% in 2QFY09). SBI has been the only PSU bank successful in doing so. The bank tapped its relationships with large corporates as well as retail customers, which enabled it to re-price its loans and maintain margins. In the retail segment, home loans (comprising over 29% of the bank’s retail advance book) grew by 23% YoY, auto loans by 30% and personal loans by 31% YoY in the last 12 months. In home loans, the bank has an average ticket size of Rs 1.7 m, making most of it priority sector lending.

    Balancing act...

    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 3,589,180   4,934,130   37.5%
    Agriculture 390,992 10.2% 488,740 9.9% 25.0%
    Retail 1,236,235 21.5% 1,735,740 35.2% 40.4%
    SME 633,939 25.6% 931,890 18.9% 47.0%
    Large corporates 1,328,014 42.7% 1,777,760 36.0% 33.9%
    Deposits 4,841,140   6,197,180   28.0%
    CASA 1,909,830 39.5% 2,460,280 39.7% 28.8%
    Term deposits 2,931,310 60.6% 3,736,900 60.3% 27.5%
    Credit/Deposit 74.1%   79.6%    

    While the bank’s advance growth has been higher than our estimates, its net interest margins are well in line with our estimates for full year FY09.

  • The bank’s fee income showed a healthy growth of 41% YoY, bringing the fee to total income ratio to 8.9% in 1HFY09 from 8.5% in 1HFY08.

  • The natural attrition has led to a sharp decline in the cost to income ratio of the bank from 55% in 1HFY08 to 46% in 1HFY09. However, as the bank will be recruiting 25,000 new employees in 2HFY09, we see this ratio going up marginally in the near future.

  • SBI did not feel the heat on its NPAs in the previous quarter with net NPAs falling to 1.3% of advances from 1.4% in 1QFY09 (1.6% in 1HFY08). However, the bank does foresee some delinquency risks in its small corporate and retail loan books going forward. The provision coverage ratio stood at 47.3% in 1HFY09.


What to expect?
At the current price of Rs 1,018, the stock is trading at 1.0 time our estimated FY11 consolidated adjusted book value. SBI’s balance sheet growth continues to remain ahead of the industry due to its widespread rural and semi-urban presence. The bank is expected to open 2,000 new branches in FY09. Although 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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