Explained: How State Bank of India regained its footing on the bourses

India's largest bank is now the most valuable state-owned entity, even as other public sector firms struggle to retain their place on the bourses

A decade ago, ONGC and Coal India were the most valuable public sect­or entities. State Bank of India (SBI) was third. Today, with a market capitalisa­tion of Rs 3.42 trillion, SBI has taken the top slot. ONGC’s market cap has eroded by 40 per cent and is a distant second in the pecking order, while Coal India has slipped to seventh with market cap plung­i­ng 60 pe­r cent. SBI’s climb to the top is in­teres­t­ing considering that it is the only value ac­c­retive stock among the top seven public sector banks (PSBs) for investors. Bank of Baroda and Punjab National Bank have tu­r­ned out to be massive wealth destroyers.

“Speak to any foreign investor, SBI is the only name in which they show interest among PSBs. It is seen as a play on economic recovery,” said Sridhar Sivaram, investment director, Enam Holdings.

In less than six months of assuming the chairman’s office, Dinesh Khara is well aware of the bank’s advantageous position and is firm that should the bank raise capital, it won’t be at a discount. Considering that the bank’s shares are just about trading at book value (though better than peers trading at 0.4-0.6x FY21 book value), Khara is clear that he would “not compromise the interest of existing shareholders”. “If I sell equity for cheap, I’m compromising their interest,” he emphasised. What gives Khara the confidence to demand premium is the way in which SBI has taken on the problem of bad loans.

With over Rs 80,000 crore of toxic assets, SBI accounted for more than 40 per cent of total exposure to bad loans outlined by the Reserve Bank of India in 2017 and 2018. From Essar Steel to Bhushan Power and Alok Industries, Jet Airlines and Dewan Housing Finance, there was trouble from all corners. In FY18, when Rajnish Kumar took charge as SBI’s chairman, the bank’s gross non-performing assets (NPAs) shot up to 10.9 per cent—the highest in 20 years.

“Call it the big brother approach or what­ever, but we had to show leadership in tackling bad loans,” Kumar explained, adding that Insolvency and Bankruptcy Code ensured the problem was solved in a transparent manner, bringing bankers to­gether to fight bad loans. “Every bank did not always agree with SBI, but there was largely consensus because people realised SBI will deal in good faith,” he recalled.

Today, with system-level gross NPAs shrinking from 14.6 per cent in FY18 to 8.2 per cent till September 30, 2020, contemp­oraries call Kumar a “resolution specialist”. For SBI, net NPA at 1.2 per cent is the best ever and exceeds the performance of priva­te peers such as Axis Bank and ICICI Bank, though at a gross level, with these banks at less than five per cent, SBI has scope for improvement. Within SBI, segm­e­nting the stressed assets resolution division also aided the clean-up act. JP Morgan notes that from about 12 per cent in FY18, the pool of stressed assets shrunk to 3.5 per cent in the December quarter of FY21 (Q3). Moreover, at Rs 20,730 crore of slipp­a­ges (loans turning bad) in Q3, it was the lowest the bank has seen in over six quarters.

Suresh Ganapathy of Macquarie Cap­i­tal feels the bank’s guidance for Rs 60,000 crore of stressed loans in FY21 (2.5 per cent of loans, the lowest in many years) is achievable. “This is contrary to expectations that SBI would disappoint on asset quality given its inconsistent track record,” he added. With less than a per cent of loans restructured in Q3, sizable stress accumulation isn’t anticipated.

The key would be to ensure mistakes aren’t repeated. Khara is confident there is an understanding that it’s the quality of lending rather than the amount that is important. This is why, even if the priv­a­te banks are adopting cash flow-based lendi­ng, SBI believes it is critical to evalu­a­te the underlying assumptions before rus­h­ing in. “The corporate sector is not yet re­a­dy for this mechanism yet,” he emphasised.

SBI aims at double-digit growth in FY22 up from 6-7 per cent in FY21 so far. Lending to small and medium enterprises (SMEs), areas of focus under production-linked incentive (PLI) schemes and defence manufacturing are identified growth opportunities. With a gradual improvement in India Inc’s capacity utilisation, bets are high on a revival in term loan demand.

But Khara is clear that retail will remain an important growth pillar for the bank. Re­tail loans account for 34 per cent of total loans, up from 20 per cent in FY15, and here’s where YONO (SBI’s integrated digital platform) has played a significant role. With a customer base of 450 to 500 mill­i­on, YONO’s penetration at around 36 milli­on may appear small. Yet, with 656.92 million remittances in February, SBI emerged the clear leader among banks in the payments space. The difference between SBI and its nearest competitor—HDFC Bank —was over 380 million remittances. That said, with PhonePe and Google Pay recor­d­ing monthly remittances of over 800 mil­l­ion each, YONO’s ability to match competition on a sustained basis will be tested.

Khara acknowledged that it’s not easy to maintain market share. He says SBI’s advantage lies in its scale of operations. “The app, which is an online marketplace with tie-ups with more than hundred merchants, has created value in terms of sourcing, reduction in operating cost and generating fee-based income,” said Khara.

Interestingly, SBI has had no problem defending overall market share even in its worst years (FY16-FY18) despite stiff competition. Accounting for 22 per cent of total bank deposits and nearly a fourth of the country’s total loans in FY20, SBI’s market share has remained unchanged in five years, while PSBs, excluding SBI, have seen their share erode from 65 per cent in FY15 to 50 per cent in FY20 on the lending and deposits businesses. In retail lending, SBI’s market share has risen from 15 per cent in FY18 to 16.5 per cent in Q3. 

Now, Khara is also betting on the strength of its subsidiaries. Listing its life insurance and credit cards businesses and small state sales augmented SBI with over Rs 30,000 crore since FY18. With SBI Asset Management Company (AMC) occupying the top slot and the gap between SBI AMC and its immediate competitor widening, it is gearing to hit the Street soon. With su­c­cessful foreign collaborations in the past with Cardiff, Carlyle, Amundi and So­c­iete Generale, SBI’s subsidiaries have stood out for their operational performance and leadership positions unlike peer PSBs.

Ganapathy believes SBI is on track to achieve and sustain one per cent return on assets target going ahead. “Re-rating due to subsidiaries’ performance would be the icing on the cake,” he noted.

Above all, SBI’s key advantage is that its chairman has always been an insider, unlike its peer PSBs. “That’s by design,” said a former bureaucrat, adding this is seen as essential to ensure continuity and understanding of the bank.

For now, positives outweigh deficie­n­c­ies. Systemically, however, the pool of lower rated assets is up at 13 per cent from 10 per cent a year ago. Likewise, agri-loans (eight per cent of total loans) posting hig­her slippages at 5.3 per cent in Q3 is ano­ther area of brewing stress. Whether these would trouble SBI is worth watching.