SBI, the largest bank in the country, reported a rather improved quarterly performance for the September quarter relative to its performance over the last few quarters. For 2QFY05, while the bank's topline rose 6% YoY (which is a healthy sign), bottomline witnessed a YoY growth of nearly 9%. There has, however, been a significant improvement in the bank's net interest income highlighting the strength of its core business. There has been a significant fall in other income. However, the same has been compensated by the fall in provisioning. A significantly higher tax incidence has led to the relatively lackluster bottomline performance.
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Largest bank in the country
State Bank of India (SBI) is India's largest financial entity with an asset size of over Rs 3 trillion. The bank, with its wide network, has diversified business interests including project finance, personal finance, housing finance, mutual funds, investment banking and insurance apart from traditional corporate lending. It is also an active trader in forex and is the leader in cash management services. SBI has a branch network of over 9,000 branches and 1,100 ATMs across the country.
What has driven the performance in 2QFY05?
Advances growth encouraging: SBI despite its size continues to show improvement in its advances growth. Compared to nearly 14% in FY04, the advances growth in 1HFY05 stood at over 24%. The growth in retail advances stood at just over 14% indicating that the bulk of the advances growth in 1HFY05 has come from the corporate segment. The benefits of higher advances growth are visible in the topline performance of the bank. SBI has reported a growth in its topline after 4 quarters of decline in the same. The fall in its yield (from 8.4% to 7.8% currently) on advances is relatively subdued compared to earlier quarters. This has also led to the improvement in the topline. On the other hand, the fall in yield (from 8.7% to 8.0%) on its investment portfolio has been relatively larger.
Operating margins: The main highlight of SBI's performance in 1HFY05 has been the growth seen in its net interest income, which has recorded a sharp rise. The bank has indicated that its net interest margin has improved to 3.15% (2.9% in FY04). While the bank has not divulged its cost of deposits, we believe that it must have fallen further in the September quarter. SBI continues to progressively reduce its interest expenses, however, its operating expenses have been rising sharply and have taken a toll on its operating margins. Operating expenses have risen mainly on account of higher contribution to pension and gratuity funds as well as higher overhead expenses. We believe that the bank is likely to face a scenario of rising operating expenses on account of implementation of better technology and higher employee expenses, due to revision in their wages.
Net Profits: SBI, like in the June quarter, has significantly reduced its provisioning. The fall has been mainly due to a fall in provisioning for NPAs. However, at the same time, the bank's provisioning for depreciation in value of investments has risen significantly indicating that the bank has been hit by a rise in interest rates. It must be noted that SBI had changed its accounting policy (regarding recognition of value of investments in the available for sale and held for trading category) in the June quarter, which has continued in the September quarter. Due to this, SBI has been able to reduce its provisioning for depreciation in its investments. SBI's net NPAs to net advances ratio stands higher at 3% in 2QFY05, compared to 2.6% in 2QFY04. Lower provisioning has aided the growth in the bottomline. The fall in other income (due to significant fall in profit from sale of investments), despite a 24% rise in other fee based income, has to an extent mitigated this improvement.
What to expect?
At Rs 460, the stock trades at a price to adjusted book value multiple of 1.2 times. Overall, SBI's performance has been healthy and we may be witnessing a revival in its core business (lending), which has been subdued since the last four quarters. Considering the rising interest rates scenario, the September quarter results have been encouraging. While the core business growth has been encouraging, there has been a slippage in its asset quality. Investors need to be weary of this aspect (high NPAs) as it has been one of the reasons for the consistently low valuations SBI has seen over the years.
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