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SBI: Costs catch up with growth - Views on News from Equitymaster

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SBI: Costs catch up with growth
Oct 31, 2009

Performance summary
  • Interest income grows by 20% YoY in 1HFY10 on the back of 16% YoY growth in advances.
  • Pressure on loan yields lead to 0.8% drop in NIMs despite higher CASA ratio.
  • Provisions fall by 45% in 1HFY10 due to the base effect of investment provisions, provisions for wage revision and pension fund in 1HFY09.
  • Cost to income ratio increases from 46% in 1HFY09 to 52% in 1HFY10.
  • Capital adequacy ratio at 14.1% at the end of 1HFY10; net NPAs at 1.7% (1.3% in 1HFY09).


Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest Income 155,665 177,758 14.2% 293,657 352,486 20.0%
Interest Expense 101,111 121,670 20.3% 190,926 246,149 28.9%
Net Interest Income 54,554 56,088 2.8% 102,731 106,337 3.5%
NIM (%)       3.2% 2.4%  
Other Income 23,431 35,251 50.4% 47,470 70,939 49.4%
Other Expense 36,052 42,989 19.2% 68,645 92,187 34.3%
Provisions and contingencies 6,106 10,161 66.4% 21,600 11,888 -45.0%
Profit before tax 35,827 38,189 6.6% 59,956 73,201 22.1%
Tax 13,289 13,228 -0.5% 20,949 24,996 19.3%
Profit after tax/ (loss) 22,538 24,961 10.8% 39,007 48,205 23.6%
Net profit margin (%)       11.1% 13.7%  
No. of shares (m)       634.8 634.8  
Book value per share (Rs)*         912.8  
P/BV (x)         2.4  
* (Book value as on 30th September 2009)

What has driven performance in 2QFY10?
  • Once again managing to leverage upon its strength in attracting low cost deposits (CASA), SBI made an appreciable effort to increase its market share in both deposits (17.7% in 2QFY10) and advances (16.6% in 2QFY10). SBI has been the only PSU bank successful in doing so. However, the bankís aggressive pricing of retail loans, particularly home loans and auto loans pressurised its asset yields and led to drop in NIMs from 3.2% in 1HFY09 to 2.4% in 1HFY10. The bankís PLR dropped from 13.8% in 1HFY09 to 11.8% in 1HFY10. Nonetheless, SBI was successful in toppling HDFC and ICICI Bank to become the largest mortgage financer in the country. In the retail segment, home loans (comprising 43% of the bankís retail advance book) grew by 23% YoY, auto loans by 44% and personal loans by 4% YoY in the last 12 months.

    Leveraging CASA strength...
    (Rs m) 1HFY09 % of total 1HFY10 % of total Change
    Advances 4,985,130   5,802,370   16.4%
    Agriculture 488,740 9.8% 589,870 10.2% 20.7%
    Retail 1,332,050 26.7% 1,436,750 24.8% 7.9%
    SME 792,970 15.9% 959,070 16.5% 20.9%
    Internation 738,520 14.8% 947,760 16.3% 28.3%
    Large corporates 1,632,850 32.8% 1,868,920 32.2% 14.5%
    Deposits 6,175,240   7,729,040 25.2%
    CASA 2,284,670 37.0% 2,952,480 38.2% 29.2%
    Term deposits 3,890,570 63.0% 4,776,560 61.8% 22.8%
    Credit/Deposit 80.7%   75.1%    

  • The bankís fee income showed a healthy growth of 58% YoY, bringing the fee to total income ratio to 11.9% in 1HFY10 from 8.9% in 1HFY09. The maximum growth came in from the corporate segment (127% YoY).

  • After the sharp decline in the cost to income ratio in FY09 due to the natural attrition, SBIís cost to income ratio moved up from 46% in 1HFY09 to 52% in 1HFY10. The same can be attributed to employee hiring and opening up of 560 branches and nearly 3,900 ATMs in the last two quarters.

  • SBI did feel the heat on its NPAs in the previous quarter with net NPAs moving up to 1.7% of advances from 1.6% in 1QFY10 (1.8% in FY09). Also, the bank does foresee some delinquency risks in its small corporate and retail loan books going forward. The pending applications for restructuring stood at Rs 87 bn at the end of 1HFY10 while the provision coverage ratio stood at 43%.

What to expect?
At the current price of Rs 2,191, the stock is trading at 1.6 times our estimated FY12 standalone adjusted book value. SBIís balance sheet growth continues to remain ahead of the industry due to its widespread rural and semi-urban presence. However, compromise on margins and asset quality are our prime concerns. While we anticipate lower growth and muted margins in the near term, SBI given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term The current valuations of the bank, nevertheless, warrant a cautious approach.

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