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SBI: Maneuvering change for growth - Views on News from Equitymaster

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SBI: Maneuvering change for growth

Oct 29, 2007

Performance summary
  • Interest income grows by 32% YoY on the back of 26% YoY growth in advances.

  • Other income grows by 42% YoY.

  • Net interest margins drop to 2.8% from 3.3% in 2QFY07 due to deduction of amortisation premium.

  • Cost to income ratio drops to 53% in 2QFY08 from 58% in 2QFY07.

  • Net profit up 36% YoY in 2QFY08 despite higher effective tax rate - due to 73% YoY drop in provisions.

Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Interest Income 87,996 116,162 32.0% 172,782 227,067 31.4%
Interest Expense 52,593 78,533 49.3% 102,059 147,428 44.5%
Net Interest Income 35,403 37,629 6.3% 70,723 79,639 12.6%
NIM (%)       3.3% 2.8%  
Other Income 14,376 20,419 42.0% 25,258 31,805 25.9%
Other Expense 28,654 30,916 7.9% 56,800 60,701 6.9%
Provisions and contingencies 3,213 857 -73.3% 5,724 2,450 -57.2%
Profit before tax 17,912 26,275 46.7% 33,457 48,293 44.3%
Tax 6,067 10,160 67.5% 13,626 17,923 31.5%
Profit after tax/ (loss) 11,845 16,115 36.0% 19,831 30,370 53.1%
Net profit margin (%) 10.2% 18.3%   8.7% 17.6%  
No. of shares (m) 526.3 526.3   526.3 526.3  
Book value per share (Rs)*         589.6  
P/BV (x)         3.5  
* (Book value as on 30th June 2007)

The country’s largest banking entity
SBI is India's largest financial entity with an asset size of over Rs 5 trillion (Rs 5,000 bn). Although the bank's loan book is largely skewed towards corporate (68% of total advances in 1HFY08), 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 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 9,373 branches and 7,546 ATMs across the country. 92.8% of the bank’s branches are on CBS platform at the end of 1HFY08.

What has driven performance in 2QFY08?
Advances – ‘Parivartan’ yields results: After several years of underperformance against its private sector peers, SBI’s attempt to change the PSU mindset of its employees through its training initiative ‘Parivartan’ seems to have yielded results in 1HFY08 itself. The country’s largest banking entity continued making an appreciable effort to stall the loss of market share in advances (15.4% in 1HFY08) and deposits (15.4%), which has been falling sequentially over the past few years, in this half year. Resultantly, while the bank’s advance growth (26% YoY) was higher than the sector average, in line with most of its peers, the bank chose to concentrate on the mid corporate and agricultural sector. The bank’s franchise of over 9,300 branches, 90 m customers and relationships with 80% of the large and 50% of the mid-sized corporates has helped it appreciably grow its balance sheet by without undue emphasis on retail assets.

While concentration towards large and mid corporates has been drawn by risk averseness and high yields respectively, the agricultural loans were a result of the government directives towards priority sector lending. Home loans comprising over 52% of the bank’s retail advance book grew 18% YoY in 1HFY08. The bank’s well-penetrated franchise also helped it grow the agricultural advances at 28% YoY.

Corporate led growth…
(Rs m) 1HFY07 % of total 1HFY08 % of total Change
Advances 2,880,780   3,635,910   26.2%
Agriculture 306,090 10.6% 390,690 10.7% 27.6%
Retail 658,101 22.8% 777,721 24.8% 18.2%
Mid corporates 649,310 22.5% 923,521 25.4% 42.2%
Large corporates 1,267,279 44.0% 1,543,978 42.5% 21.8%
Deposits 3,926,150   4,841,140   23.3%
CASA 1,574,560 40.1% 1,797,540 37.1% 14.2%
Term deposits 2,351,590 59.9% 3,043,600 62.9% 29.4%
Credit/Deposit 73.4%   75.1%    

As compared to the bank’s performance on the advances front, the deposit growth was largely concentrated in term deposits due to aggressive of the same in the last quarter. As at the end of September 2007, SBI’s deposits grew by 23% YoY, higher than the sector average. The cost of deposits increased from 4.6% in September 2006 to 5.4% in September 2007. However, the bank’s CASA (current account savings account) ratio dropped from 40.1% in 1QFY07 to 37.1% in 1HFY08. While the net interest margins have been partially impacted by this, the drop of 0.5% (2.8% in 1HFY08) was also due to the deduction of Rs 5.7 bn of amortisation premia on Investments from net interest income (as per the RBI’s new guidelines).

Other income boost: SBI’s other income grew by 42% YoY in 1HFY08. While the bank’s non-interest income grew by 25.9% YoY, the growth in fee income was lower at 14% YoY. The proportion of fee income to total income and non-interest income to total income was 16% and 28% respectively in 1HFY08. Having said that, the fact that the amortisation premia on Investments was written off against NII offered a major boost to the bank’s other income.

Lower employee costs filter in: SBI’s staff costs registered a contraction of nearly 4% (as percentage of total income) during 1HFY08 to 36%. Having said that, the cost to income ratio decreased from 59% in 1HFY07 to 55% in 1HFY08. While nearly 7,000 employees exited the bank under an exit policy in FY07, around 6,000 employees are expected to retire annually for the next couple of years. We expect the same to reduce further going forward as 38,000 employees retire from the bank’s payrolls by 2010. The new recruitments of the bank are merely 15% of the total number of employees retiring every year. Nonetheless, since the bank is targeting 8,500 ATMs and 10,000 branches by the end of FY08, its operating expenses are likely to firm up in FY09.

NPAs - No surprises: SBI reported no negative surprises on the NPAs side with both gross and net NPAs reducing to 2.9% and 1.6% of advances respectively in 1HFY08, from 3.4% and 1.7% respectively in 1HFY07. However, the NPA provision coverage ratio of the bank has marginally come down to 45.2% in 1HFY08 from 51.3% in 1HFY07.

International over retail: The net profit of SBI’s foreign offices at US$ 85.8 m in 1HFY08 were 80% of the international business’ full year profit in FY07. The balance sheet size of the foreign offices at US$ 18.7 bn in 1HFY08 (13.2% of SBI’s FY07 balance sheet) has grown by 30% over FY07. The advances in this businesses grew by 42% YoY during the same period (60% YoY), while deposits clocked growth of over 22% YoY. Resultantly, the bank focused on this segment as against the mortgage loans in the retail segment due to risk averseness. This is despite the fact that the bank claimed to have 90% of its mortgage borrowers in the ‘middle-class-salaried’ category with low loan to asset value ratio.

Capital raising and group restructuring in the offing: The bank plans to raise Rs 100 bn within the current financial year to bolster capital and meet the growing credit demand. This may be by way of debt or equity or a combination of the two. The bank expects its CAR (12.9% in 1HFY08) to be impacted by 80 basis points due to Basel II compliance. The promoter stake (59%) in the bank has been sold by the RBI to the government.

SBI is planning to foray into general insurance and has shortlisted two to three foreign players in the segment. The bank is also planning to get into pension funds management through either SBI Life or SBI Mutual Fund. Entry into the financial planning and wealth management segments is also on the cards. Going forward, the bank is planning to set up an NBFC that would be a holding company for all its non-banking businesses and would be listed separately. The merger of its associate banks would depend upon the success of the merger with State Bank of Saurashtra.

What to expect?
At the current price of Rs 2,084, the stock is trading at 2.1 times our estimated FY10 standalone adjusted book value. The lower effective tax rate is expected to sustain going forward. We are also enthused by the significant improvement in the bank’s return on assets (0.1%)and return on equity (17.8%). However, the fact that the life insurance venture itself will require investments to the tune of Rs 40 bn in the next 5 years, seems to suggest further dilution of capital or capital raising at higher cost. While 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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