• JUNE 20, 2002

SBI: Competition hits growth

India's largest public sector bank, State Bank of India (SBI), has reported a 52% rise in full year profits and a 14% growth in interest income. The bank's growth pace however, slowed down in the fourth quarter, after having reported a 19% growth in interest income in the first nine months of FY02.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Income from operations 74,565 76,195 2.2% 260,034 298,101 14.6%
Other Income 14,784 14,206 -3.9% 40,178 41,745 3.9%
Interest expense 50,390 52,740 4.7% 177,556 207,288 16.7%
Net interest income 24,175 23,455 -3.0% 82,478 90,813 10.1%
Other expenses 32,894 19,779 -39.9% 82,988 72,109 -13.1%
Operating Profit (8,719) 3,675 - (510) 18,704 -
Operating Profit Margin (%)-11.7%4.8% -0.2%6.3% 
Provisions and contingencies (1,588)6,989- 13,912 20,10244.5%
Profit before Tax 7,653 10,89242.3% 25,756 40,34656.6%
Tax 4,237 4,73511.8% 9,714 16,03065.0%
Profit after Tax/(Loss) 3,416 6,15780.3% 16,043 24,31651.6%
Net profit margin (%)4.6%8.1% 6.2%8.2% 
No. of Shares (m) 526.3 526.3   526.3 526.3  
Diluted Earnings per share*26.046.8 30.546.2 
P/E Ratio 5.3  5.3 

SBI's interest income from lending declined by 7% during the fourth quarter, due to sluggish credit demand and downturn in industrial activity. The bank's income from investments, however, continued to remain strong, which is reflected from 19% growth recorded in the fourth quarter. The bank seems to be holding long maturity portfolio, which offered it higher investment income. This is also reflected from a 4% decline in other income recorded by SBI in the fourth quarter (bond prices declined steeply in the last quarter). It is unlikely that the bank would record strong treasury gains in the current fiscal, with interest rates remaining stable.

Income break-up
Rs m)4QFY014QFY02ChangeFY01FY02Change
Interest on advances 28,126 26,157 -7.0% 111,433 110,634 -0.7%
Income on investments 31,605 37,599 19.0% 112,297 142,719 27.1%
Interest on bal with RBI 6,135 7,170 16.9% 17,033 30,549 79.4%
Others 8,699 5,269 -39.4% 19,272 14,199 -26.3%
Total 74,565 76,195 2.2% 260,034 298,101 14.6%

During the year, the bank's profits were lower by Rs 1 bn due to change in accounting policy on valuation of investments as per the RBI guidelines. Even after including this gains in other income, the bank's other income was higher by only 7%. The proportionate contribution of other income to total income declined to 12% from 13% in the previous year. This speaks about the stiff competition faced by the bank in its fee based income segment. Private sector banks in the current year recorded strong gains in fee based revenue stream by taking away some share from SBI.

The bank managed to improve its operating margins to 6% due to savings on account of employee cost. Excluding Rs 13 bn which the bank provided last year on account of VRS charges and IMD issue expenses, improvement in margins was about 140 basis points. SBI's cost to income ratio reduced to 54% in FY02 from 68% in FY01. SBI aims to bring down the ratio to 50% by technology upgradation and employee rationalization in the next 4 years.

SBI increased its provisions by 45% during the year to Rs 20 bn and tax provision too jumped by 65%. Tax provision for FY02 includes deferred tax liability of Rs 3.4 bn, excluding which tax provision was higher by 30%.

At the current market price of Rs 243, SBI is trading at a P/E of 5x and price to book value ratio of less than 1x. SBI is holding its analyst meet today. We will update our analysis on the bank once detailed information becomes available.

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