Adverse times may not be bad for all. State Bank of India (SBI), the largest domestic banker with a share of around 16 per cent (in both, advances and deposits), is aiming to up its market share further and in a profitable manner. The above industry growth in advances in the recent past is just an indication. A wide branch network would sustain the management’s stance of improving its business share in these difficult times.
A focus on agriculture and rural segments would give it an edge compared to its private peers. Diversified loan portfolio, higher exposure to low cost deposits with improving cost efficiencies would ensure steady profitability. Consolidation of SBI with its affiliate banks (which command another 6-7 per cent of the market share) and unlocking of value from its subsidiaries make SBI an ideal pick for long-term investors.
Rural drive
Rural and agricultural segments are an under-penetrated market for the banking sector. The historical focus of public sector banks (PSB), vis-à-vis the private counterparts, in these areas, would stand them in good stead. SBI, the biggest of the PSU lot, owns 13 per cent of the industry’s total branches in rural areas; around 70 per cent (or 7,100 branches) of its total branches are in the rural and semi urban (RSU) regions.
SBI intends to improve its branch strength in RSU areas to around 10,000 by 2010, backed by enhanced use of technology. The improved operational efficiencies along with the typically higher CASA levels (low-cost current and savings account deposits) in rural areas would ensure sustained profitability, besides growing volumes.
Sound financials
The total interest income and the net profits have grown by an average 12.5 per cent and 16.3 per cent, respectively in the last 5 years. In the first half of 2009, in line with growing profitability, the net profits grew by 29 percent, above its five-year average due to lower growth in operating expenses, over the corresponding period. Recently, advances have grown at 37 per cent y-o-y in Q2 FY09, much faster than in FY08 (at around 23.5 per cent) indicating that credit off-take is high, with the bank’s inclination to increase its market share in the advances segment.
It is noteworthy that advances were robust to corporate and SMEs, in spite of SBI increasing PLR by 1 percentage point this August. The advance growth is witnessed at a time, when most of the banks are decreasing their credit off take, to avoid any probable increases in asset deterioration. As a preferred lender for many borrowers, the bank has been able to lend at higher levels for the deposits garnered, thus ensuring a credit-deposit ratio of above 77 per cent in the last two years. Although, net NPA (non-performing assets) have fallen from 1.8 per cent in FY08 to 1.34 per cent in Q2 FY09, the aggressive advances stance along with low provision coverage may lead to deterioration in asset quality in the future.
SBI holds the largest CBS-enabled branch network (around 10,500) with growing efficiency levels, reflected in the cost-to-income ratio improving from around 54 per cent in FY07 to around 45 per cent in H1 FY09. SBI is planning to add around 25,000 employees and aggressive expansion of around 1,500 branches during the course of next year, which would put pressure on the cost-to-income ratio in the near-term.
Despite increases in operating costs, the additional staff and branches would help to attract CASA deposits (which stand comfortable at around 40 per cent) along with increase in fee income (cross selling of insurance and mutual fund products). The higher CASA levels have enabled SBI to maintain net interest margins (around 3.16 per cent) at decent levels. Going forward, although mobilisation of higher-interest term deposits would put pressure on margins, the cut in CRR and repo-rate by the RBI could offset a large part of this pressure, enabling SBI to sustain margins at over 3 per cent.
| VALUABLE BANKER | |||
| in Rs crore | FY 2008 | FY 2009 (E) | FY 2010 (E) |
| Net Interest Income | 17,021 | 20,894 | 24,151 |
| Other Income | 8,695 | 10,074 | 11,487 |
| Operating Profit | 13,108 | 16,674 | 18,806 |
| Net Profit | 6,729 | 7,834 | 8,312 |
| EPS (Rs) | 106.6 | 124.1 | 131.6 |
| P/E (x) | 10.7 | 9.2 | 8.7 |
| P/BV (x) | 1.47 | 1.3 | 1.16 |
| E: Analysts estimates | |||
Add-ons
The RBI’s roadmap of allowing foreign banks, to operate on par with domestic banks in India would pose greater competition to PSBs in the future. It becomes prudent for the domestic banks to consolidate to match the foreign counterparts in terms of size and scalability. Large branch network of more than 15,000, balance-sheet size of more than Rs 10 lakh crore, common technology platform along with about a fourth of total deposits and advances in the country, would create a behemoth- SBI group. While SBI and its associate banks have already integrated their operations to a large extent, the physical merger is expected to shape up in the future.
In fact, SBI has rolled out it plans in this regard with the merger of State Bank of Saurashtra (SBS) with itself in August 2008. Although opposition from employee unions is on the cards, governmental support is also vital as was the case with SBS, for the mergers to happen swiftly.
In addition to affiliates, SBI has exposure in other financial services businesses like life insurance (SBI Life), asset management (SBI Mutual Fund), investment banking (SBI Cap) though its subsidiaries. SBI Life and SBI MF are leading players occupying fifth and sixth positions in terms of market shares in their respective categories. Other subsidiaries operate in credit cards, factoring, security trading and primary dealership in money markets.
Investment rationale
A wide network, better connectivity (using IT) and strong brand equity would help the bank grow its rural business. The receipt of around Rs 1,700 crore through the debt waiver scheme in December 2008 will also be a positive in the near-term. SBI has observed a decline in CAR to 11.5 per cent in the latest quarter, due to growth in advances and this could be short-term phenomena as the bank is trying to raise capital.
Besides, the recent cut in risk weights would also increase its capital base in line with the RBI’s promulgated CAR levels of 12 per cent. A diversified loan book, judicious lending and stricter monitoring would keep the NPAs at reasonable levels, in these tough times.
The stock is available at around 9 times of its estimated FY09 earnings and P/BV of around 1.3 of its FY09 standalone book value. Industry leadership, well-spread out asset mix along with additional value of around Rs 300-350 per share (on account of value of affiliate banks and subsidiaries) together with attractive valuations, makes it a valuable proposition. The stock can deliver around 20-25 per cent in a year’s time.
