State Bank of India: Size matters

POUND WISE
Sarath Chelluri / Mumbai December 8, 2008, 0:19 IST

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
FY 2009 FY 2010
in Rs crore FY 2008
(E) (E)
Net Interest
17,021 20,894 24,151
Income
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.
Balance sheet
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Sources of funds
Owner's fund
Equity share capital 1,113.29 1,112.68 899.34 889.83 736.75
Share application money - - - - 0.02
Preference share capital 350.00 350.00 350.00 350.00 350.00
Reserves & surplus 48,419.73 45,357.53 23,413.92 21,316.16 11,813.20
Loan funds
Secured loans - - - - -
Unsecured loans 2,18,347.82 2,44,431.05 2,30,510.19 1,65,083.17 99,818.78
Total 2,68,230.84 2,91,251.26 2,55,173.45 1,87,639.16 1,12,718.75
Uses of funds
Fixed assets
Gross block 7,443.71 7,036.00 6,298.56 5,968.57 5,525.65
Less : revaluation reserve - - - - -
Less : accumulated
3,642.09 2,927.11 2,375.14 1,987.85 1,487.61
depreciation
Net block 3,801.62 4,108.90 3,923.42 3,980.71 4,038.04
Capital work-in-progress - - 189.66 147.94 96.30
Investments 1,03,058.31 1,11,454.34 91,257.84 71,547.39 50,487.35
Net current assets
Current assets, loans &
34,384.06 31,129.77 23,551.85 15,642.79 11,115.99
advances
Less : current liabilities &
43,746.43 42,895.38 38,228.64 25,227.88 21,396.16
provisions
Total net current assets -9,362.37 -11,765.62 -14,676.78 -9,585.09 -10,280.17
Miscellaneous expenses not
- - - - -
written
Total 97,497.56 1,03,797.62 80,694.15 66,090.96 44,341.52
Notes:
Book value of unquoted
- - - - -
investments
Market value of quoted
- - - - -
investments
Contingent liabilities 8,40,670.63 4,01,114.91 1,99,771.41 1,34,920.99 1,07,311.46
Number of equity
11126.87 11126.87 8992.67 8898.24 7367.16
sharesoutstanding (Lacs)
Profit loss account
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 38,250.39 39,467.92 28,457.13 17,517.83 11,838.10
Expenses
Material consumed - - - - -
Manufacturing expenses - - - - -
Personnel expenses 1,971.70 2,078.90 1,616.75 1,082.29 737.41
Selling expenses 669.21 1,750.60 1,741.63 840.98 601.71
Adminstrative expenses 7,475.63 6,447.32 4,946.69 2,727.18 1,248.31
Expenses capitalised - - - - -
Cost of sales 10,116.54 10,276.82 8,305.07 4,650.45 2,587.43
Operating profit 5,407.91 5,706.85 3,793.56 3,269.94 2,679.78
Other recurring income 330.64 65.58 309.17 466.02 448.46
Adjusted PBDIT 5,738.55 5,772.43 4,102.73 3,735.96 3,128.25
Financial expenses 22,725.93 23,484.24 16,358.50 9,597.45 6,570.89
Depreciation 678.60 578.35 544.78 623.79 590.36
Other write offs - - - - -
Adjusted PBT 5,059.96 5,194.08 3,557.95 3,112.17 2,537.88
Tax charges 1,830.51 1,611.73 984.25 556.53 522.00
Adjusted PAT 3,740.62 4,092.12 2,995.00 2,532.95 2,007.28
Non recurring items 17.51 65.61 115.22 7.12 -2.08
Other non cash adjustments -0.58 - - - -
Reported net profit 3,757.55 4,157.73 3,110.22 2,540.07 2,005.20
Earnigs before appropriation 6,193.87 5,156.00 3,403.66 2,728.30 2,058.29
Equity dividend 1,224.58 1,227.70 901.17 759.33 632.96
Preference dividend - - - - -
Dividend tax 151.21 149.67 153.10 106.50 90.10
Retained earnings 4,818.07 3,778.63 2,349.39 1,862.46 1,335.22

Cash flow
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Profit before tax 5,116.97 5,056.10 3,648.04 3,096.61 2,527.20
Net cashflow-operating activity -14,188.49 -11,631.15 23,061.95 4,652.93 9,131.72
Net cash used in investing activity 3,857.88 -17,561.11 -18,362.67 -7,893.98 -3,445.24
 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Netcash used in fin. activity 1,625.36 29,964.82 15,414.58 7,350.90 -1,227.13
Net inc/dec in cash and equivlnt -8,074.57 683.55 20,081.10 4,110.25 4,459.34
Cash and equivalnt begin of year 38,041.13 37,357.58 17,040.22 12,929.97 8,470.63
Cash and equivalnt end of year 29,966.56 38,041.13 37,121.32 17,040.22 12,929.97

Ratios
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Per share ratios
Adjusted EPS (Rs) 33.62 36.78 33.30 28.47 27.25
Adjusted cash EPS (Rs) 39.72 41.97 39.36 35.48 35.26
Reported EPS (Rs) 33.78 37.37 34.59 28.55 27.22
Reported cash EPS (Rs) 39.87 42.56 40.64 35.56 35.23
Dividend per share 11.00 11.00 10.00 8.50 8.50
Operating profit per share (Rs) 48.60 51.29 42.19 36.75 36.37
Book value (excl rev res) per share (Rs) 445.17 417.64 270.37 249.55 170.35
Book value (incl rev res) per share (Rs.) 445.17 417.64 270.37 249.55 170.35
Net operating income per share (Rs) 343.77 354.71 316.45 196.87 160.69
Free reserves per share (Rs) 351.22 346.21 199.52 193.24 110.70
Profitability ratios
Operating margin (%) 14.13 14.45 13.33 18.66 22.63
Gross profit margin (%) 12.36 12.99 11.41 15.10 17.64
Net profit margin (%) 9.74 10.51 10.81 14.12 16.32
Adjusted cash margin (%) 11.45 11.81 12.30 17.55 21.14
Adjusted return on net worth (%) 7.55 8.80 12.31 11.40 15.99
Reported return on net worth (%) 7.58 8.94 12.79 11.43 15.97
Return on long term funds (%) 56.72 62.34 82.46 56.24 70.54
Leverage ratios
Long term debt / Equity 0.01 0.01 0.01 0.01 0.02
Total debt/equity 4.42 5.27 9.50 7.45 7.98
Owners fund as % of total source 18.46 15.95 9.52 11.83 11.13
Fixed assets turnover ratio 5.14 5.61 4.52 2.94 2.14
Liquidity ratios
Current ratio 0.78 0.72 0.61 0.62 0.51
Current ratio (inc. st loans) 0.13 0.10 0.08 0.08 0.09
Quick ratio 5.94 6.42 6.04 6.64 4.98
Inventory turnover ratio - - - - -
Payout ratios
 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Dividend payout ratio (net profit) 36.60 33.12 33.89 34.08 36.05
Dividend payout ratio (cash profit) 31.00 29.08 28.84 27.36 27.85
Earning retention ratio 63.23 66.35 64.80 65.82 63.98
Cash earnings retention ratio 68.87 70.51 70.22 72.58 72.17
Coverage ratios
Adjusted cash flow time total debt 49.41 52.34 65.12 52.30 38.43
Financial charges coverage ratio 1.25 1.25 1.25 1.39 1.48
Fin. charges cov.ratio (post tax) 1.20 1.20 1.22 1.33 1.40
Component ratios
Material cost component (% earnings) - - - - -
Selling cost Component 1.74 4.43 6.12 4.80 5.08
Exports as percent of total sales - - - - -
Import comp. in raw mat. consumed - - - - -
Long term assets / total Assets 0.75 0.78 0.80 0.82 0.83

« Previous Y

Balance Sheet of State Bank of India ------------------- in Rs. Cr. -------------------

Mar '05 Mar '06 Mar '07 Mar '08 M

12 mths 12 mths 12 mths 12 mths 12

Capital and Liabilities:

Total Share Capital 526.30 526.30 526.30 631.47 6
Equity Share Capital 526.30 526.30 526.30 631.47 6
Share Application Money 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00
Reserves 23,545.84 27,117.79 30,772.26 48,401.19 57,3
Revaluation Reserves 0.00 0.00 0.00 0.00
Net Worth 24,072.14 27,644.09 31,298.56 49,032.66 57,9
Deposits 367,047.53 380,046.06 435,521.09 537,403.94 742,0
Borrowings 19,184.31 30,641.24 39,703.34 51,727.41 53,7
Total Debt 386,231.84 410,687.30 475,224.43 589,131.35 795,7
Other Liabilities & Provisions 49,578.89 55,538.17 60,042.26 83,362.30 110,6
Total Liabilities 459,882.87 493,869.56 566,565.25 721,526.31 964,4
Mar '05 Mar '06 Mar '07 Mar '08 M

12 mths 12 mths 12 mths 12 mths 12

Assets
Cash & Balances with RBI 16,810.33 21,652.70 29,076.43 51,534.62 55,5
Balance with Banks, Money at Call 22,511.77 22,907.30 22,892.27 15,931.72 48,8
Advances 202,374.45 261,641.53 337,336.49 416,768.20 542,5
Investments 197,097.91 162,534.24 149,148.88 189,501.27 275,9
Gross Block 6,691.09 7,424.84 8,061.92 8,988.35 10,4
Accumulated Depreciation 4,114.67 4,751.73 5,385.01 5,849.13 6,8
Net Block 2,576.42 2,673.11 2,676.91 3,139.22 3,5
Capital Work In Progress 121.27 79.82 141.95 234.26 2
Other Assets 18,390.71 22,380.84 25,292.31 44,417.03 37,7
Total Assets 459,882.86 493,869.54 566,565.24 721,526.32 964,4

Contingent Liabilities 131,325.40 191,819.34 259,536.57 736,087.59 614,6

Bills for collection 44,794.10 57,618.44 70,418.15 93,652.89 152,9
Book Value (Rs) 457.39 525.25 594.69 776.48 9

Source : Religare Technova

Explore SBI connections

Print/Copy to Excel :
« Previous Y

Profit & Loss account of State Bank of India ------------------- in Rs. Cr. -------------------

Mar '05 Mar '06 Mar '07 Mar '08 Ma

12 mths 12 mths 12 mths 12 mths 12

Income
Interest Earned 32,428.00 35,794.93 39,491.03 48,950.31 63,7
Other Income 7,119.90 7,388.69 7,446.76 9,398.43 12,6
Total Income 39,547.90 43,183.62 46,937.79 58,348.74 76,4
Expenditure
Interest expended 18,483.38 20,159.29 23,436.82 31,929.08 42,9
Employee Cost 6,907.35 8,123.04 7,932.58 7,785.87 9,7
Selling and Admin Expenses 2,634.64 1,853.32 3,251.14 4,165.94 5,1
Depreciation 752.21 729.13 602.39 679.98 7
Miscellaneous Expenses 6,465.82 7,912.15 7,173.55 7,058.75 8,8
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00
Operating Expenses 11,278.18 11,872.89 13,251.78 14,609.55 18,1
Provisions & Contingencies 5,481.84 6,744.75 5,707.88 5,080.99 6,3
Total Expenses 35,243.40 38,776.93 42,396.48 51,619.62 67,3
Mar '05 Mar '06 Mar '07 Mar '08 Ma

12 mths 12 mths 12 mths 12 mths 12

Net Profit for the Year 4,304.52 4,406.67 4,541.31 6,729.12 9,1
Extraordionary Items 0.00 0.00 0.00 0.00
Profit brought forward 0.34 0.34 0.34 0.34
Total 4,304.86 4,407.01 4,541.65 6,729.46 9,1
Preference Dividend 0.00 0.00 0.00 0.00
Equity Dividend 657.87 736.82 736.82 1,357.66 1,8
Corporate Dividend Tax 93.75 103.34 125.22 165.87 2
Per share data (annualised)
Earning Per Share (Rs) 81.79 83.73 86.29 106.56 1
Equity Dividend (%) 125.00 140.00 140.00 215.00 2
Book Value (Rs) 457.39 525.25 594.69 776.48 9
Appropriations
Transfer to Statutory Reserves 3,552.89 3,566.51 3,682.15 5,205.69 7,0
Transfer to Other Reserves 0.01 0.00 -2.88 -0.10
Proposed Dividend/Transfer to Govt 751.62 840.16 862.04 1,523.53 2,0
Balance c/f to Balance Sheet 0.34 0.34 0.34 0.34
Total 4,304.86 4,407.01 4,541.65 6,729.46 9,1

Source : Religare Technova

Explore SBI connections

State Bank of India « Previous Years

Cash Flow ------------------- in Rs. Cr. -------------------

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 6521.60 6837.36 7625.08 10438.90 14180.64

Net Cash From Operating Activities -2780.74 6039.14 -1776.07 -856.87 29479.73
Net Cash (used in)/from
-498.80 -1134.18 -284.56 -2798.01 -1651.93
Investing Activities
Net Cash (used in)/from Financing
-969.25 461.98 9494.11 19371.12 5097.38
Activities
Net (decrease)/increase In Cash
-4248.79 5108.86 7383.89 15716.24 32925.18
and Cash Equivalents
Opening Cash & Cash Equivalents 43566.62 39322.10 44560.00 51968.69 69524.50
Closing Cash & Cash Equivalents 39322.10 44560.00 51968.69 67466.34 104403.80

Source : Asian CERC

This data can be easily copy pasted into a Microsoft Excel sheet

State Bank of India « Previous Years

Key Financial Ratios ------------------- in Rs. Cr. -------------------

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Investment Valuation Ratios

Face Value 10.00 10.00 10.00 10.00 10.00
Dividend Per Share 12.50 14.00 14.00 21.50 29.00
Operating Profit Per Share (Rs) 148.50 124.77 147.72 173.61 230.04
Net Operating Profit Per Share (Rs) 692.96 719.54 833.38 899.83 1,179.45
Free Reserves Per Share (Rs) 68.67 178.33 184.43 356.61 373.99
Bonus in Equity Capital -- -- -- -- --
Profitability Ratios
Interest Spread 4.28 4.31 4.20 4.32 4.34
Adjusted Cash Margin(%) 14.54 13.06 11.43 12.81 13.04
Net Profit Margin 11.56 11.21 10.12 11.65 12.03
Return on Long Term Fund(%) 105.35 97.89 99.20 86.83 100.35
Return on Net Worth(%) 19.43 17.04 15.41 13.72 15.74
Adjusted Return on Net Worth(%) 19.35 15.93 14.47 13.70 15.74
Return on Assets Excluding
0.94 0.89 0.80 0.93 0.95
Revaluations
Return on Assets Including
0.94 0.89 0.80 0.93 0.95
Revaluations
Management Efficiency Ratios
Interest Income / Total Funds 8.41 7.94 8.27 8.82 8.88
Net Interest Income / Total Funds 4.15 3.71 3.85 3.87 3.79
Non Interest Income / Total Funds 0.17 0.30 0.19 0.14 0.11
Interest Expended / Total Funds 4.26 4.23 4.42 4.96 5.09
Operating Expense / Total Funds 2.34 2.34 2.39 2.16 2.06
Profit Before Provisions / Total
1.80 1.52 1.54 1.74 1.75
Funds
Net Profit / Total Funds 0.99 0.92 0.86 1.04 1.08
Loans Turnover 0.20 0.16 0.15 0.15 0.16
Total Income / Capital Employed(%) 8.58 8.24 8.46 8.96 8.99
Interest Expended / Capital
4.26 4.23 4.42 4.96 5.09
Employed(%)
Total Assets Turnover Ratios 0.08 0.08 0.08 0.09 0.09
Asset Turnover Ratio 5.45 5.10 5.44 6.32 7.20
Profit And Loss Account Ratios
Interest Expended / Interest Earned 57.00 56.32 59.35 65.23 67.28
Other Income / Total Income 1.99 3.60 2.25 1.56 1.18
Operating Expense / Total Income 27.34 28.37 28.19 24.13 22.91
Selling Distribution Cost Composition 0.18 0.28 0.20 0.30 0.33
Balance Sheet Ratios
Capital Adequacy Ratio 12.45 11.88 12.34 13.47 14.25
Advances / Loans Funds(%) 56.35 65.66 76.16 78.31 78.34
Debt Coverage Ratios
Credit Deposit Ratio 52.55 62.11 73.44 77.51 74.97
Investment Deposit Ratio 55.83 48.14 38.22 34.81 36.38
Cash Deposit Ratio 5.23 5.15 6.22 8.29 8.37
Total Debt to Owners Fund 15.25 13.75 13.92 10.96 12.81
Financial Charges Coverage Ratio 1.46 1.40 1.37 1.37 1.36
Financial Charges Coverage Ratio
1.27 1.25 1.22 1.23 1.23
Post Tax
Leverage Ratios
Current Ratio 0.04 0.05 0.05 0.07 0.04
Quick Ratio 4.79 5.50 6.52 6.15 5.74
Cash Flow Indicator Ratios
Dividend Payout Ratio Net Profit 17.46 19.06 18.98 22.64 22.90
Dividend Payout Ratio Cash Profit 14.86 16.35 16.75 20.56 21.13
Earning Retention Ratio 83.88 80.93 80.97 77.33 77.11
Cash Earning Retention Ratio 86.12 83.64 83.21 79.41 78.88
AdjustedCash Flow Times 67.82 74.03 84.87 72.64 75.05

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Earnings Per Share 81.79 83.73 86.29 106.56 143.67

Book Value 457.39 525.25 594.69 776.48 912.73