SBI > Reliance: The King is Dead, Long Live the King!

It was sometime in May 1995 that I first stepped into the dealing room of a stock market broking firm. Just out of school, I remember accompanying my father to his brokers office, curious to see where all the magic happens!

I distinctly recall a client asking to put in an order to purchase shares of "Bank" and me sheepishly asking the dealer how does he know which bank, the client is referring to.

In those days, "Bank" meant State Bank of India (SBI). For a lot of people, there was just one bank as far as the stock market was concerned - The State Bank of India.

Such was its name and popularity at the time and the stock was one of the market darlings for most traders.

Back then, the best banking stocks in India - HDFC bank, ICICI bank, Kotak bank, and Axis bank were still finding their feet.

Much has changed over the years... private banks have led the banking sector over the last two decades gradually increasing their market share.

Public sector banks on the other hand were unable to keep pace with technological developments and conceded market share. Further over the years, SBI among other banks has been plagued by poor asset quality.

However, the sector has witnessed a gradual improvement in gross NPAs since 2018. They are down to about 6% levels in 2022.

PSU banks have relatively performed better than their private peers in recent times as far as corporate slippages are concerned. Once considered troublesome, their corporate book is pushing their loan growth.

And SBI being the country's largest lender is back in the limelight.

After seven years, SBI has toppled private lender HDFC Bank in profitability as the state-owned lender reported its highest ever quarterly net profit for the September quarter.

And that's not all... with its stellar performance, SBI has become the country's most profitable firm.

After holding the title of India's most profitable company for decades, Reliance Industries Ltd lost it to the State Bank of India, which posted a consolidated net income of Rs 147.5 bn in the latest quarterly results.

Market watchers haven't been this bullish on State Bank of India in almost two decades. They're betting on the lender's improving asset quality and expect the momentum to sustain.

But will it? Let's dig deeper...

SBI: Sunshine Mixed with a Little Hurricane?

Just days before his demise in August 2022, big bull Rakesh Jhunjhunwala had mentioned that he is betting on PSU banks as he was very bullish on them.

Explaining his rationale behind the same, Jhunjhunwala had said that he thinks credit will rise, and the consequence of that will be an increase in the pricing power of banks.

"PSU banks have great power of gathering deposits," Jhunjhunwala had said.

It seems once more, Jhunjhunwala may have been right with his bullish view.

The Nifty PSU Bank index has zoomed 67% from its 52-week low of 2,283.85, touched on 20 June 2022 and hit a new high of 3,811.15 on 9 November 2022.

PSU banks in the past have struggled with low asset quality. However, since FY18, the industry has gradually improved, with gross non-performing assets (NPAs) declining from FY18 highs of 11% to roughly 6% levels in FY22.

PSU banks are in a good position at this point. It's widely expected that large banks such as SBI will build on the momentum of strong economic growth as well as resolution of legacy loans to further improve asset quality.

In the first half of the current financial year 2022-23, the cumulative net profit of all public sector banks (PSBs) increased 32% to Rs 409.9 bn.

"The continuous efforts of the government for reducing the NPAs and further strengthening the health of PSBs are now showing tangible results. All 12 PSBs declared net profit of Rs 25,685 crore in Q2FY23 & total Rs 40,991 crore in H1FY23, up by 50% & 31.6%, respectively (y-o-y)," Finance Minister Nirmala Sitharaman said in a tweet.

SBI has performed relatively better than its private peers in corporate slippages. The retail segment, on the other hand, has never really troubled the bank as a major chunk of its retail segment comes from housing loans.SBI's corporate book, which was once seen as a burden, is now expected to drive loan growth. Corporate credit has increased as a result of strong public and private expenditure and rising working capital limit use.

PSU banks stand to gain the most because they have a larger share of corporate lending than private banks do.

SBI could continue its strong performance on the back of strong consumer retail demand and with cards, micro finance, vendor financing, and corporate growth too picking up pace.

The risk of a fresh NPA cycle remains low, thus supporting strong profitability and return ratios for the bank.

SBI: Up, Up and Away...

In February 2017, the heads of 10 top public sector banks (PSBs), led by Arundhati Bhattacharya, at the time, chief of India's largest lender, State Bank of India (SBI), met the then finance minister Arun Jaitley.

The official reason for this meeting, organised by the Indian Banks' Association, was to talk about the pile of bad debt on banks' books, and how to lower the level of these non-performing assets.

This was a huge, dark cloud over India's financial system and the entire economy.

Since then, aided by the government's implementation of a 4R's strategy - recognition of NPAs transparently, resolution and recovery of value from stressed accounts, recapitalising, and reforms = there has been a significant improvement.

Gross non-performing assets (GNPAs) of banks having hit a six-year low of 5.9% as of March 2022.

SBI has seen improvement in its asset quality over the past few years with recoveries from some of its large corporate NPAs under the National Company Law Tribunal (NCLT). It has continued focusing on the resolution of stressed assets.

Over the last few years, SBI's stressed assets resolution group has become one of the most important verticals of the bank.

And the efforts have paid off. The GNPAs of the bank have been on a downward journey from 10.9% of total assets in 2018 to 3.9% in 2022.

Gross NPAs which stood at a high of Rs 2,234.2 bn in 2018 have almost halved to Rs 1,120.2 bn in 2022.

Net NPAs have significantly reduced to 1.02% in FY 2022 from 5.7% in 2018. The bank has also done well to manage fresh slippages which have come down from Rs 1,002.8 bn in 2018 to Rs 267.7 bn in 2022.

The bank also made recoveries of Rs 198.7 bn through various modes in the financial year ended 31 March 2022.

During FY22, interest income increased by 3.9% to Rs 2,754.6 bn as compared to Rs 2,651.5 bn in FY21, supported by advances growth and a marginal decline in yield.

SBI's net interest income (NII) showed growth of 9.03% to Rs 1,207.1 bn in FY2022 from Rs 1,107.1 bn in FY2021. The bank was able to maintain its interest expenses by bringing down the cost of funds.

Net profit jumped by 55.2% to Rs 316.8 bn in FY2022, boosted by a record profit of Rs 91.1 bn in the March 2022 quarter.

But like they say, the best was yet to come...

SBI reported a net profit of Rs 132.6 bn for the September quarter, a surge of 74% from a year earlier on improved asset quality and healthy loan growth.

The state-run lender's profit beat street estimates by a mile and in the process beat Reliance Industries to become the most profitable company in India for the September 2022 quarter.

Asset quality improved further in FY 2023 with Gross NPA ratio down 45 basis points to 3.52% in September 2022 from 3.97% in March 2022.

Net NPA fell below 1% and stood at 0.8%, down from 1.02% for the same period last year.

Credit growth continued rising 20% YoY, with robust growth in the corporate segment where advances grew 21.1% to Rs 9,170 bn from Rs 7,567 bn YoY.

Strong growth in retail personal segment driven by home loans, xpress credit and other loans helped it grow 18.8% from Rs 9,044 bn to Rs 10,748.5 bn YoY.

SBI: The Banker to Every Indian and Much More

"The Banker to Every Indian" is the tag line for State Bank of India.

It is perhaps the only bank that can make this claim.

But over the years, the bank has evolved into so much more than being just a bank.

The Bank has successfully diversified businesses through its various subsidiaries i.e., SBI General Insurance, SBI Life Insurance, SBI Mutual Fund, SBI Cards, etc.

As on 31 March, 2022, SBI had 20 non-banking subsidies, 9 overseas banking subsidiaries and 1 non-banking overseas subsidiary.

SBI has spread its presence globally and operates through 229 offices in 31 countries.

The subsidiaries have performed just as well and have over the last few years come into their own with consistent growth and become market leaders in their respective segments.

Here are SBI's top 5 subsidiaries and their performance for the year ended 31 March, 2022:

1. SBI Life Insurance Company Limited (SBI Life): SBI Life is the second largest life insurance company in India after Life Insurance Corporation of India.

   SBI Life delivered a PAT of Rs 15.1 bn in FY22 against Rs 14.5 bn in FY21. The AUM of the company crossed Rs 2.6 trillion (tn) mark and recorded a growth of 21% at Rs 2.6 tn as of 31 March 2022 compared to Rs 2.2 tn on 31 March 2021.

2. SBI Capital Markets Limited (SBICAPS): SBICAPS, a 100% owned subsidiary of the Bank, is one of India's leading domestic Investment Banks, registered with SEBI as a category-I Merchant Banker and a Research Analyst.

   It was ranked No.1 - India Borrower Loans - Mandated Lead Arranger with a market share of 22.6% (March 2022) as per Bloomberg League Table. On a consolidated basis, the company has posted a profit after tax of Rs 6.2 bn in March 2022 against Rs 5.2 bn in the previous year.

3. SBI Funds Management Limited (SBIFML): SBIFML is the Asset Management Company (AMC) of SBI Mutual Fund. It is the market leader in the industry. In the financial year 2021-22, it grew 28.3% against the industry average of 19.5%.

   The company's Average Assets Under Management during the quarter ended March 2022 was Rs 6,470.6 bn, with a market share of 16.86%.

   On a standalone basis, SBIFML has posted a net profit of Rs 10.7 bn during the financial year ended March 2022against Rs 8.6 bn earned last year.

4. SBI Cards & Payments Services Limited (SBICPSL): SBICPSL is a non-banking financial company that offers an extensive credit card portfolio to individual cardholders and corporate clients.

   The company is ranked 2nd with a market share of 19% just behind HDFC bank. For the year ended March, 2022 the company posted a net profit of Rs 16.1 bn, a growth of 64% YoY.

5. SBI Payment Services Private Limited (SBI Payments): SBI is the first PSB to form an exclusive JV, i.e. SBI Payments, for merchants acquiring business and holding a 74% stake in the company.

   The company's objective is to create a state-of-the-art acceptance ecosystem in the country and enable merchants to accept payments digitally across various form factors. SBI Payments is one of the largest acquirers in the country as of 31 March 2022.

   The company earned a net profit of Rs 1.4 bn for the financial year ended 31 March, 2022.

The Way Forward

SBI enjoys a dominant position in the Indian banking sector, being the largest bank in terms of business and asset size, with advances of Rs 30,350.7 bn and deposits of Rs 41,902.5 bn as on September, 2022.

The bank enjoys a market share of around 23% in advances and around 24% in deposits.

With the next decade expected to belong to the India, demand should continue to remain strong.

The sharp increase in public investment and capital expenditure in the backdrop of the latest government initiatives will lend support to growth and credit demand.

Primarily demand shall be driven by investment demand due to the infrastructure projects being led by the government of India.

The government's Production-Linked Incentive scheme (PLI), launched with the aim of incentivising manufacturing, is estimated to attract a capex of approximately Rs 4 tn for the next five years.

These PLI schemes will result in strong growth for banking over the coming years.

The management of SBI had earlier given a guidance of return on equity (ROE) of 15% for FY 2024. However, with ROE already at 16.1% for the first half of FY2023, it is expected to be achieved in 2023.

The bank reported a ROA (return on assets) of 1% on the back of a 10-year low credit cost of just 27 bps. This is the best ROA reported by SBI since it listed in 1993.

When calculating return on assets for a bank, we need to remember that banks are highly leveraged, so a 1% ROA is a very good number.

Over the last few years, the bank had been focused on strengthening the balance sheet by improving margins and reducing credit costs. Now, the bank is consciously focusing on improving its market share.

SBI is planning to revamp its current and savings accounts (CASA), salary accounts and transaction banking businesses to increase deposits by hiring an external consultant to redesign strategy for these businesses.

The consultant will work with the bank to study and assess current technology solutions of the bank, re-design end-to-end digitisation, and digital solutions of bank across transaction banking and its products.

The bank's digital strategy is on track with 45% of retail asset accounts and 62% of savings accounts acquired through YONO in the second quarter of FY23.

SBI's capital adequacy ratio (CAR) improved marginally to 13.5% in the September 2022 quarter, higher than the regulatory requirement of 11.7% and marginally above 13.3% a year ago.

On the other hand, the CAR of HDFC bank declined to 18% against 20% in September 2021. Similarly, CAR for ICICI bank also declined to 18.27% against 19.5% reported in September 2021.

The capital adequacy ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

CAR is critical to ensure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent.

But can SBI continue to maintain its margins or was this a one-off performance?

One concern here is that SBI's deposit growth at 10% was just half of its growth in advances at 20% for the September quarter.

This has some analysts worried about the bank's liquidity position and its ability to lend at the same pace as it has over the last few quarters.

Considering the bank has Rs 3.5 tn in investments which can be encashed if loan demand rises, it is likely that lending and margins could remain at these levels or even increase marginally over the next few quarters.

However, once the bank has to raise new money, it will have to start raising deposit rates which would result in margins getting compressed.

Dinesh Kumar Khara, Chairman, SBI has said the bank continues to remain very well capitalised and the internal accruals will be more than enough for it to take care of the normal business growth requirements.

Compared to other leading banks, SBI's net profit for the September quarter is miles ahead. For the same period, HDFC bank reported net earnings of Rs 106 bn and ICICI Bank reported Rs 75.5 bn compared to the massive net of Rs 1,326.4 bn of SBI.

The stock has delivered a CAGR of 24.2% over the last three-year period and currently trades just below its 52-week high.

Although, it has beat Reliance Industries to claim the title of most profitable company for the September quarter, it must be noted that on a first half basis, Reliance continues to be the most profitable firm with Rs 316.1 bn in net as against SBI's Rs 220.7 bn.

The last time SBI beat Reliance Industries in full year profit was in 1998 with a net profit of Rs 18.6 bn against Rs 16.5 bn reported by Reliance.

Will SBI be able to repeat that feat 25 years later for the financial year 2023?

Only time will tell... For now, SBI continues to bask in its glory as the 'numero uno' company in India in terms of profitability.

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