Don't bank on Insurance

There may be value in the life insurance business but the bank too needs to perform.

Late in 2005, State Bank of India (SBI)yielded its number one slot in the market capitalisation sweepstakes to ICICI Bank. The market wasn't really off the mark because even after that the bank has been struggling to make money. In the year to March 2007, SBI's pre-provisioning profits(PPP) actually fell 11.5 per cent and that too on the back of a meagre 2.8 per cent growth in FY2006.

Now as the bank readies itself for a Rs 6,000 crore equity issue, Chairman OP Bhatt is flaunting the bank's insurance venture SBI Life. SBI Life --a joint venture between the bank and Cardiff SA of France -- has done well and may be worth $7 billion. But the bank's performance is hardly inspiring.

Despite SBI's bank's enviable network of 9,000 odd branches, deposits grew just 3.5 per cent in FY06, though the growth was better 15 per cent in FY07. The bank continues to lose market share-from nearly 19 per cent in March 2004 to about 15 per cent now. To be fair, SBI's trying; its share of retail deposits(which are more stable) are up from 26.6 per cent in FY05 to 59.1 per cent in FY07. It has effectively leveraged its distribution in the rural and semi-urban areas and deposits from these areas grew at 25 per cent last year.

As for the asset book, in a market where retail credit has been driving the industry, SBI's housing loan portfolio is just Rs 38,000 crore compared with ICICI Bank's Rs 64,000 crore. While ICICI has been building up a franchise, the SBI brand is losing connect with the younger generation, which is going to be a significant percentage of the population in the years ahead. Says Ravi Trivedy, executive director, KPMG Advisory, "The brand is losing its attractiveness and relevance with youngsters, it's not the first name they think of when it comes to banking."

That may be true for companies too. With multiple banks to choose from, they are spoilt for choice. SBI has been trying to move away from bigger firms and earn larger spreads by rejigging its portfolio in favour of higher-yielding asset classes like small & medium enterprises (SMEs) and mid-sized corporates. Last year, the bank upped loans to mid-sized companies by 34 per cent while its total loan book grew 30 per cent. With the likes of ICICI Bank planning to tap the rural markets, SBI could be up against some keen competition. Nonetheless, as Robin Roy, executive director, Pricewaterhouse Coopers points out, "SBI has a wealth of data on the SME sector and it should leverage this, using the branches as service and delivery points."

But to do that, SBI needs good people and that is the bank's biggest challenge. Over the last ten years, the bank has been a hunting ground for private banks and the best people have moved out in search of better career options. Says Trivedy, "The bank needs to be able to hire the best possible people and not just at senior levels. It's at the lower levels where the operating performance kicks in that it needs to recruit talent." Moreover, as PwC's Roy says, since banks are not necessarily the first port of call for companies today, products and services need to be marketed aggressively for which the bank requires a strong marketing team.

In fact, one reason why SBI Life has managed to do well--it has emerged the number three player in the private sector in FY07 with premium income of Rs 2,900 crore-- say industry watchers, is because it has been able to choose its people. The bank's asset management company (AMC) with Rs 18,500 crore hasn't done too badly either, again because it has been able to recruit talent from business schools. Of course, as Seshadri Sen, analyst, Macquarie Securities, points out, SBI Life has also used the bank's distribution effectively to grow the business. He believes the bank needs to leverage it further to build new revenue streams. In the meanwhile though, SBI would do well to focus on the core business of banking. Ultimately, that alone will fetch it the appreciation of shareholders.