State Bank of India’s (SBI’s) stock, which has caught the fancy of investors in recent times, has delivered 30 per cent returns — four times more the broader indices — in the last two months.
One reason is the increase in the bank’s market share, led by an improvement in profitability and efficiency. SBI’s loan book grew 22 per cent in 2009-10, higher than the industry average of 16 per cent.
Besides an expanding loan book, the June quarter saw profitability improve, with net profit rising 25 per cent, led by robust core income and lower operating expenses. With economic growth picking up, experts suggest the macro environment is improving, which should sustain growth and lower asset quality concerns.
| FAST, PROFITABLE GROWTH | |||
| in Rs crore | FY10 | FY11E | FY12E |
| NII | 23671 | 30834 | 37558 |
| Op. profit | 18553 | 25074 | 30201 |
| Net profit | 10610 | 12100 | 15800 |
| EPS (Rs) | 166.7 | 189.3 | 243.2 |
| Book value (Rs) | 1086 | 1270 | 1492 |
| P/BV (x) | 2.8 | 2.4 | 2.0 |
| E: Analyst estimates | |||
Improving shares, profitability
In the last few financial years, SBI has been focusing on expanding its balance sheet, when most of its private peers were conservative. This helped SBI increase market share to about 16 per cent.
While its loan book continues to be fairly diversified, with corporate loans accounting for about 44 per cent of advances, SBI has increased focus on the relatively higher margin retail segment, which should support margins.
Other key segments are international advances and retail, which comprise about 15 per cent and 24 per cent, respectively, of the bank’s loan portfolio.
While 2009-10 saw a slowdown in term deposits, SBI managed to increase its low-cost deposits, aided by its 10,000-strong branch network. In 2009-10, its low-cost deposits grew 23 per cent, while overall deposits grew just eight per cent.
The share of CASA (current and savings account) deposits has risen to over 45 per cent.
Outlook
SBI is actively mulling a rights offer that’s expected to fuel growth.
After the successful merger of State Bank of Saurashtra, it is looking to further consolidate other banking subsidiaries under it. However, with labour unions standing in the way, it may not be a smooth ride.
While a higher share of low-cost deposits has been aiding margins, firm interest rates on term deposits could lead to some money shifting from the former to the latter.
This could put some pressure on net interest margins in the next few quarters that stood at 3.2 per cent in the June quarter — the highest in the last five quarters. With economic growth picking up, loan growth should remain healthy.
Likewise, concerns on asset quality are abating. SBI has also been able to increase its provision coverage to 61 per cent, though lower than the mandated 70 per cent. SBI’s life insurance arm reported a three-fold jump in profit to Rs 114 crore on an year-on-year basis for the June quarter.
A separate listing of this arm should help unlock value for shareholders in the medium term.
The stock is trading at 2.1 times estimated 2011-12 earnings. Given the sharp run up, investors may wait for a correction and consider buying at lower levels.
