SBI: First choice of Investors
Investors can increase exposure to SBI’s stock as the bank shows sustained business growth, has promising future prospects and boasts of attractive valuation.
With the banking and financial sector likely to outperform the market this year, it’s no wonder that investors are eagerly awaiting State Bank Of India’s (SBI) rights issue. The bank is raising funds to augment its capital base to meet RBI’s capital adequacy needs. Investors can take this opportunity to increase their exposure to this stock, given SBI’s sustained business growth, promising future prospects and attractive valuations.
Business : SBI has seven associate banks and five subsidiaries.On a standalone basis, SBI is the largest constituent of the group by assets and net income. It contributed 70% to the consolidated group assets as on
Its associate banks and subsidiaries, though relatively small, are doing well in their respective businesses. SBI is
Despite a slow growth in credit offtake and easing deposit rates, by end December ’07, SBI had recorded a 26% growth each in advances and deposits , better than the industry average of 22-23%.
Financials : In the past five years, SBI has seen slower growth in profit compared to its peers. SBI recorded a fiveyear compound annual growth of 13% and 10% in net profit and operating profit, respectively. The average growth for the rest of the industry was around 22% during the period. The slower growth in profit is largely because of higher operating expenses and increasing provisions. Further, increase in bond market yields during ’05-06 forced SBI to book heavy amortisation losses, which also strained its balance sheet. But the bank is keen on curtailing costs.
Its cost-income ratio has gradually improved from 54.4% in FY02 to 51% in December ’07, which is in line with the industry average. SBI has been able to improve its operational efficiency. Its net interest margin (NIM) improved to 3.4% in FY06 from 2.91% in FY02. This has marginally come down to 3% in FY08 so far on account of rising deposit rates and aggressive deposit mobilisation. But the drop in SBI’s margins is lower compared to other banks due to improved yield on advances and sustained growth in advances.
Margins are likely to improve in the coming quarters as the bank has already slashed its deposit rates and the average maturity of these costly deposits is one year. Recent reduction in interest rates and expectation of softer rate regime may boost credit offtake.
Valuations : The rights issue price of Rs 1,590 appears deeply discounted, given the current valuations of the bank on a consolidated basis. While the stock is currently trading at a P/E of 14, investors holding SBI shares can accumulate more shares at a P/E of just around 10 times its trailing 12 months earnings. Considering its upside potential in another 18-24 months, investors can consider this issue.
Challenges :SBI has a very challenging task vis-à-vis future acquisitions and consolidation of associate banks, which involve a number of risks in terms of asset quality, accommodating employees liabilities and so on. Any disruption in these processes may adversely impact SBI’s operations and business. SBI has a very diversified advance portfolio, with a higher exposure to agriculture and small and medium enterprises (SMEs), which have a higher delinquency ratio.
So far, SBI has managed to maintain asset quality — by December ’07, it had a net non-performing asset (NPA) ratio of 1.44%. But any further deterioration in SBI’s NPA portfolio and an inability to improve its provisioning coverage can pose a major threat to its business. SBI faces competition from other domestic and foreign commercial banks in all its products and services. The competition is likely to get fiercer once foreign banks are allowed to set up wholly-owned subsidiaries and also given the option to directly invest in Indian banks. This is likely to happen by April ’09.
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