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SBI: Play on the economy

Dec 1, 2000

State Bank of India (SBI), a public sector banking giant, reported a spectacular profit growth during the first half-ended September 2001. A year on year 52% rise in net profits is the due to a combination of higher advances, decline in cost of deposits and a lower provision for depreciation in the value of investments. During the first half of the current year, SBIís credit to deposit ratio increased to 56% (52% in 1HFY00). However, the interest spread of the bank declined to 2.8% (3.2%). Increase in the PLR (prime lending rate) with effect from 12th August 2000 to 12% is expected to improve its interest spread marginally in the second half of the year as the bank will not increase interest rate on its deposits in line with the higher yield on advances.

Financial Snapshot
(Rs m) 1HFY00 1HFY01 Change
Interest Income 105,074 121,268 15.4%
Other Income 16,105 17,090 6.1%
Total Income 121,178 138,358 14.2%
Operating Profit 46,242 56,097 21.3%
Other Expenses 28,787 33,362 15.9%
Profit Before Tax 17,455 22,735 30.3%
Tax 3,058 4,770 56.0%
Profit After Tax 14,396 17,966 24.8%
Provisions & contingencies 7,372 7,292 -1.1%
Net Profit 7,025 10,674 52.0%

Key Ratios
Particulars 1HFY00 1HFY01
Operating profit margins 28.7% 32.2%
Tax / PBT 17.5% 21.0%
Net profit margins 11.9% 13.0%
Cash EPS (Rs) 54.71 68.27
EPS (Rs) 26.69 40.56

SBIís net profits increased by a remarkable 25%, even if one were to remove the effect of decline in provisions and contingencies. One factor that contributed to this was the abolition of interest tax from 1st April 2000 due to which operating margins during 1HFY01 were higher. However, other income earned by the bank during the period increased by a marginal 6%. This was due to a decline in forex income by more than 18%.

SBI's average advances during the 1HFY01 increased by 23.8% and deposits grew by 15.0%. Credit growth for banking sector is picking up. During the six months ended September 2000, year on year increase in total credit was 22.6%, higher than 15.6% increase registered the previous year. Higher credit off take is likely to benefit SBI in increasing its customer base.

At the current market price of Rs 182 SBI trades at a P/E multiple of 5 times its first half annualised earnings and 4 times its projected March 2001 earnings. SBI is a play on the economy and should do well if the credit growth sustains. But with declining interest spreads, the bank will have to do much better in attracting fee based income. We believe, SBI should be able to sustain its profitability, through greater attention to costs, higher business volumes, focus on retail banking and new customised products.

Comparative Valuations
Particulars SBI Corporation
BOI Oriental
Market Price (Rs) 182 87 12 35
P/E (x) 4.5 4.0 4.1 2.2
Price/Book Value (x) 0.8 0.8 0.3 0.5

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