State Bank of India, (SBI), India's largest bank (owned by the Indian government) is turning a new leaf. From being a laid-back public sector entity with a bloated workforce, it is slowly emerging as an aggressive player in the banking sector, with strong emphasis (although forcibly) on the use of technology to integrate its various services. With the economy entering a higher growth orbit, let us take a look at the prospects of the bank in the long term.
Before we do so, let us look briefly at the profile of the bank. SBI has an over 17% share in total advances and over 20% share in the total deposits of all scheduled commercial banks in the country. It has a branch network of over 9,000 braches spread across the country, with a customer base of over 70m. The bank with its wide network has diversified business interest including project finance, personal finance, housing finance, mutual funds, investment banking and insurance apart from traditional corporate lending. SBI is also an active trader in forex and is the leader in cash management services.
As far as the prospects of the bank are concerned, SBI is in a good position to capitalize on the robustness in retail credit demand. Retail loans now account for 18% of the total loan portfolio of the bank. SBI has already become a major player in the fastest growing segment in the retail lending sphere, i.e. housing loans. Also as the industrial sector is showing signs of recovery (7% GDP growth expected in FY04), we can expect higher credit offtake from this segment. SBI, with its reach and repute, will be in a good position to take advantage of this situation to grow its asset size.
What is likely to further supplement this growth is the fact that SBI is aggressively implementing technology across its various branches, in the form of computerisation as well as a core banking solution. This will help the company a great deal, as it will improve the efficiency of the existing operations as well as help service clients in a better way. SBI is likely to save further on employee costs as a large number of employees (34,000, or 17% of its workforce) are expected to retire in the next 3-5 years. This is apart from benefits the bank would derive post the VRS it offered sometime back. All these initiatives are expected to help SBI improve its operating efficiency significantly in the future.
However, there are impediments SBI faces as far as its potential is concerned. One of them is government interference. In the past, politics has played an important role in the decisions made by the bank with respect to its lending. This has led to significant amount of NPAs in the past, which the bank is still trying to clean up. Until the government interference reduces, the bank may find it difficult to implement many of the changes it needs to make, both on the operational as well as asset quality level. The detailed research report, will give a better perspective regarding the bank's prospects.
Based on the current price of Rs 478, SBI trades at an adjusted price to book ratio of 1.7x its FY04 estimates. SBI, despite its size, has shown that it can be as nimble as its private sector peers in the retail segment. While SBI has managed to initiate broad changes as far as its operations are concerned, what remains to be seen is whether it will be able to sustain the same in the long run. Also, internal opposition to change (mainly from employees) has to be countered effectively to maintain this process of transformation. Asset quality is another challenge the bank faces over the long-term. As far as valuations are concerned, SBI group's valuations are a bit skewed as the bank's associate companies are better performing than SBI itself. Hence, it may be wiser to evaluate the group as a whole. From a group point of view, SBI still looks promising as a long-term investment option.
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