SBI, the largest bank in the country, has reported a 21% YoY growth in its bottomline despite a marginal fall in topline for the September quarter. SBI's strong bottomline performance for 2QFY04 (like 1QFY04) was primarily on account of improvement in its operating margins as well as a strong growth in other income. The bank also has significantly increased its provisioning in the September quarter, which led to some curtailment in the bottomline growth. For 1HFY04, the performance on a YoY basis has been similar with an almost flat topline and a 20% growth in bottomline.
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The fall in topline has been mainly due to fall in interest income from both investments as well as advances. This is despite a 13% growth in advances in the period ending September 26, 2003 as compared to the same period in FY03. This indicates that the yield on advances has been dropping significantly and that growth in advances has not been able to compensate for the same. Yield on advances has fallen by nearly 100 basis points to 8.4% at the end of September 2003 compared to the same period last year. The bank's yield on investments has also fallen strongly in the same period. The bank has indicated that credit demand is picking up and, for FY04, the total growth in advances may be to the tune of 15%-16%. We, in our research model, have assumed a growth of 16% in advances for SBI in FY04.
Despite fall in deposit costs for SBI, the growth in net interest income has been marginal in the September quarter. Falling yields as well as inability of the bank to lower its interest expenses further has led to this. The bank has, however, indicated that with the redemption of Resurgent India Bonds (RIB), the cost of deposits will come down effective from October 2003 and this will benefit the bank going forward. Hence, we could witness relatively better improvement in the bank's net interest income from here on. Net interest margin of the bank has fallen to 2.8% (2.9%) in the period ending September 2003. In our projections, we have arrived at a net interest margin of 3% for FY04. SBI however has seen a fall in operating margins. This is mainly due to one time expenses by the company in technology implementation, upgradation, computerisation as well as payment towards gratuity. We believe that operating margins of SBI will continue to remain under pressure as the bank continues to upgrade its technology as well as implement computerisation across its branches.
Despite the fall in operating profits as well as significantly higher provisioning, SBI has been able to maintain strong growth in bottomline mainly due to significant rise in other income. Growth in other income has been achieved due to the inclusion of a significant amount of profits (Rs 10 bn from the government buyback scheme) from the sale of G-Secs in the September quarter. SBI is likely to show strong growth in other income in the next few quarters as it may continue to book profits on its G-Sec portfolio. Due to strong provisioning, SBI's net NPAs to advances ratio stands reduced at 2.6% (4.5%) in 1HFY04. We expect NPAs to settle at 3.6% of advances by FY04, after factoring in the new 90-day norm for recognising NPAs. Aggressive provisioning has, however, abated the bottomline growth of the bank in the September quarter.
At Rs 476, the stock is trading at a P/E multiple of 7x its annualised 1QFY04 earnings. The adjusted price to book value (based on net NPAs in FY03) stands at 1.9x. Despite its size, SBI has managed to grow its advances well in 1HFY04, indicating that initiatives that the bank is taking are paying off. Its drive to technologically integrate all its branches will lead to further improvement in efficiencies. SBI is also doing well in the retail segment. The only concern at this stage is the frequent change in management at the top and the uncertainty it brings along with it.
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