State Bank of India (SBI) has swung into action to check its rising operating expenses, one of the key factors responsible for dragging down its fourth quarter profits.
As a first step, it has decided to scale down its branch expansion plan and is now expected to open around 500 branches during the current financial year, as against nearly 1,000 proposed earlier.
The country’s largest lender, which was on a branch opening spree, had opened around 1,000 branches and nearly 8,000 automated teller machines (ATMs) in 2009-10. Since 2006-07, the bank has opened nearly 3,000 branches, of which 75 per cent have managed to break even. Typically, an SBI branch takes around 18 months to break even. In the fourth quarter alone, opening of new branches and ATMs dented the bank’s profits by Rs 100 crore.
“SBI started expanding in a big way in 2008-09 and 2009-10. However, the returns have not accrued to the magnitude that was expected. So, there is a thinking that we should first exploit the present capacity fully before stepping up expansion,” a senior SBI executive said.
The scaling down of the branch expansion plan is part of SBI’s overall game plan to check costs. The public sector lender intends to cap the growth in operating expenses to around 5 per cent during the current financial year. The growth in operating expenses had reached 30 per cent in 2009-10 and 41 per cent in the fourth quarter, courtesy aggressive branch expansion and addition to headcounts.
Together with high provisions for bad debt and staff costs, higher operating costs resulted in a 32 per cent decline in SBI’s fourth quarter net profit.
The change in strategy comes at a time when there are signs that the crisis in Europe could impact the pace of economic growth in 2010-11. A bank executive said SBI had to look at three aspects to shore up the bottom line -- costs, capital and liquidity. “While capital and liquidity are not critical issues at present, the management was of the opinion that cost management was crucial,” said a source.
Besides, it was felt that by controlling costs, the bank could use some of the resources to improve the loan-loss coverage ratio, which is provisions for bad debt.
While the bank has to deal with rising levels of non-performing assets, it has to increase the provision coverage ratio to 70 per cent from 59 per cent at present, for which it has to set aside an additional Rs 2,100 crore over the next two quarters.
A number of belt-tightening measures are also being put in place to keep costs under check.
While overall costs are being cut, the bank has decided to go ahead with its planned employee induction programme. “This is a long-term focus area as a large number of staff is going to superannuate over the next two years. So, we need to find replacements and train them,” an executive added.
The bank has hired nearly 30,000 people during the last two years, which has also added to the overall costs. During the fourth quarter, Rs 100 crore was spent as wages for new employees.
“Higher operating cost has been incurred in FY10 to employ more people and open more branches/ATMs which will lead to improved service delivery and higher productivity in the coming years,” SBI said in a presentation to analysts.
Bank executives, however, said unlike some of the private players, which had sacrificed growth in business to put their house in order, SBI will go about acquiring business in an aggressive way. The public sector bank is projecting 20 per cent credit growth for 2010-11, compared with 17 per cent last year.
