Analysis Report: State Bank of India (BUY; Estimated Price: Rs. 450)

About SBI

Founded in 1806, Bank of Calcutta was the first Bank established in India and over a period of time evolved into SBI. SBI represents a sterling legacy of over 200 years. It is the oldest commercial Bank in the Indian subcontinent, strengthening the nation’s trillion-dollar economy and serving the aspirations of its vast population. The Bank is India’s largest commercial Bank in terms of assets, deposits, profits, branches, number of customers and employees, enjoying the continuing faith of millions of customers across the social spectrum.

New Initiatives

Bank embarked on several new business initiatives during the year which have started bearing fruit. Bank has identified four key areas of focus: NPA reduction, risk and mitigates, cost control and technology for better customer service.

1. For healthy CASA of 46% planned for the FY 2015, Bank has linked medical insurance to Savings Bank account holders. Number of free multicity cheques was linked to the Average Quarterly Balance (AQB) of the account.
2. Considering emerging needs of the farmers in tune with market dynamics, the Bank has rolled out a new loan product, namely ‘Multi- Purpose Agri Gold Loan’, which is a hassle-free and tailor-made product for all investment credit needs, such as minor irrigation, horticulture and farm machinery, among others.
3. Bank has launched a new product named ‘SBI HER Ghar’, which offers a concession of 5 bps on the prevailing Home Loan interest rates for women borrowers. The Scheme has been well accepted in the market and now accounts for 24% of the incremental sanction of home loans. 
4.  For SME, Bank has developed new risk-mitigated products, such as SBI Asset Backed Loan, SBI Fleet Finance Scheme and POS Linked Current Account with Overdraft Scheme.
5. For speedy on line payment/settlement, the Bank has launched ‘SBIePay’, to facilitate e-Commerce/ m-Commerce transactions among merchants, customers and various financial institutions for all kinds of e-Commerce payments.
6. In retail segment, Bank has introduced online car loan application portal.
7. In the area of Internet Banking, Bank has added several major new features to the Online SBI portal. For instance, online opening of Multi Option Fixed Deposit A/c, e-Annuity Deposit A/c, PPF A/c, self-blocking of lost ATM cards and a Smart phone application for internet banking users. This application is available on both Android and i-phone. For Corporate, the new added features include online Term Deposit Accounts, Digital Signature and Certificate based second factor authentication, etc.

Looking Ahead

NPA Reduction:

Early review of all small loans through LOS and high-value loans through LLMS (ii) Product wise data analysis for evolving credit-Scoring Models (iii) SMA committees met in 1092 meetings, 4667 accounts reviewed and upgraded, 2783 accounts, through Multi-tiered differentiated strategies for individual accounts and SARB brought under SAMG (iv) SME collection teams with 68 officials exclusively trained to restructure SME accounts –pilots rolled out (v) Consultant hired for developing predictive risk models to detect NPAs.

Cost Control and non-interest income:

(i) Under cost cutting- centralization of insurance/back office of foreign offices (ii) to economies operation, a number of cost cutting measures introduced (iii) Productivity and efficiency parameters –Dashboards are piloted in four centres (iv) Concurrent Auditors to work online facilitating on- going monitoring by Inspection Department (v) Online tool for controllers visits.

Branch Expansion

	Mar ' 13	Jun ' 13	Sep ' 13	Mar ' 14	Jun ' 14	Sep ' 14	Growth rate
Metro	2341	2362	2417	2524	2535	2548	1.71%
Urban	2624	2652	2745	2890	2906	2936	2.27%
Semi-Urban	4165	4181	4222	4399	4427	4460	1.38%
Rural	5686	5707	5759	6056	6078	6137	1.54%
Total	14816	14902	15143	15869	15946	16081	1.65%

During the financial year 2013-14, Bank opened 1,053 branches, 57% of which were in rural and semi-urban areas taking the total number of branches of the Bank to 15,869. Branches are well distributed among Metro, Urban and Rural areas. Myriad specialized branches have been opened during the year like four exclusive HNI branches, five new NRI branches, two new MCG branches at Ludhiana and Vijayawada, etc. These dedicated branches have an excellent ambience, along with a well-skilled team of officials to serve customers.

Financials

For the financial year ending March 2014, Total Liabilities for State Bank of India stand at Rs. 23,95,981.60 crores as compared to Rs. 21,33,108.55 crores previous year. Deposits comprise 76.75% of Total Liabilities at Rs. 18,38,852.35 crores as compared to 76.29% last year. Borrowings constitute 9.34% of Total Liabilities at Rs. 2,23,759.71 crores as compared to 9.55% last year. On the asset side, Advances comprise 65.87% of Total Assets at Rs. 15,78,276.69 crores as compared to 65.29% previous year. Investments are 24.16% of Total Assets at Rs. 5,78,793.09 crores vs. 24.35% last year. Cash and Balances with RBI comprise 4.76% of Total Assets at Rs. 1,14,095.60 crores as compared to 4.20% previous year. This indicates a relatively similar position of the balance sheet over the past year.

Rs in crores	2010	2011	2012	2013	2014
CAPITAL AND LIABILITIES
Capital	634.88	634.99	671.04	684.03	746.57
Reserves & Surplus	82500.7	82836.25	105558.97	124348.98	146623.96
Minority Interest	2631.27	2977.17	3725.67	4253.86	4909.15
Deposits	1116464.56	1255562.48	1414689.4	1627402.61	1838852.35
Borrowings	122074.57	142470.76	157991.36	203723.2	223759.71
Other Liabilities and Provisions	125837.97	163416.58	147319.73	172695.87	181089.86
TOTAL	1450143.95	1647898.23	1829956.17	2133108.55	2395981.60
ASSETS
Cash and Balances with Reserve Bank of India	82195.58	119349.83	79199.21	89574.03	114095.60
Balance with banks and money at call & short notice	29658.29	35977.62	48391.62	55653.69	53065.74
Investments	412749.26	419066.45	460949.13	519343.42	578793.09
Advances	869501.64	1006401.55	1163670.21	1392608.03	1578276.69
Fixed Assets	6013.88	6486.82	7407.97	9369.92	10559.78
Other Assets	50025.3	60615.96	70338.03	66559.46	61190.71
TOTAL	1450143.95	1647898.23	1829956.17	2133108.55	2395981.61

Interest earned grew at a rate of 12.55% in the financial year ending March 2014 at Rs. 1,89,062.44 crores. Interest expended forms 64.25% of Interest earned at Rs. 1,21,479.04 crores as compared to 63.59% for the previous year. Operating expenses constitute 27.92% of Total Income at Rs. 63,368.74 crores as compared to 26.34% for the previous year. Provisions and contingencies form 12.16% of Total Income as compared to 11.27% for the previous year. Net Profit forms 6.25% of Total Income at Rs. 14,173.77 crores as compared to 8.93% previous year. Overall, this depicts a relatively slight fall in performance of the bank.

Rs in crores	Mar '10	Mar'11	Mar'12	Mar '13	Mar ' 14
Income
Interest earned	100080.73	113636.44	147197.39	167976.14	189062.44
Other Income	33771.09	34207.48	29691.58	32583.7	37882.12
Total Income	133,851.82	147,843.92	176,888.97	200,559.84	226,944.56
Expenditure
Interest expended	66,637.51	68,086.40	89,319.55	106,817.91	121,479.04
Operating Expenses	42415.4	46518.01	46856.03	52819.8	63368.74
Provisions & Contingencies (include taxes)	12785.28	22059.57	24883.93	22599.13	27607.31
Total Expenses	121,838.19	136,663.98	161,059.51	182,236.84	212,455.09
Net Profit for the Year	12,013.63	11,179.94	15,829.46	18,323.00	14,489.47
Less : Minority Interest	279.81	494.99	630.21	638.44	633.43
Add: Share Of P/L Of Associates	0	0	143.85	231.68	317.73
Net P/L After Minority Interest & Share Of Associates	11,733.82	10,684.95	15,343.10	17,916.24	14,173.77

The flow of the annualized ratios across the five years are as follows:

	2010	2011	2012	2013	2014
Efficiency ratio	0.4124	0.4639	0.4056	0.3760	0.4009
Overhead ratio	0.0381	0.0416	0.0392	0.0354	0.0380
NIM		0.0336	0.0380	0.0346	0.0332
Return on average asset	0.0081	0.0065	0.0084	0.0084	0.0059
return on earning asset	0.0086	0.0070	0.0088	0.0088	0.0062
Non interest  income to average asset	0.0233	0.0208	0.0162	0.0153	0.0158
Average collection of interest	38.8321	39.6027	37.4966	36.3977	37.5444
Loan/Deposits	0.7788	0.8016	0.8226	0.8557	0.8583
Liquid Asset/ Deposit	0.0266	0.0287	0.0342	0.0342	0.0289
Common Equity/Earning asset	0.0610	0.0548	0.0609	0.0615	0.0649
Interest earned/Earning asset		0.0866	0.1007	0.1004	0.0961

The ratios generally indicate towards a lower performance of State Bank of India in the financial year 2014 as compared to the previous year.

In September quarter of the financial year 2014, Total Interest earned grew at a rate of 9.38% at Rs. 51,331.73 crores as compared to a growth rate of 12.67% for the same quarter previous year at Rs. 46,926.12 crores. Total Income grew at a rate of 15.07% at Rs. 61,098.67 crores as compared to a growth rate of 6.37% for the same quarter previous year at Rs. 53,097.99 crores. Interest earned/Other Income comes out to be 5.2557 for September quarter this year vs 7.6032 for the same quarter previous financial year. This indicates towards rising proportion of fee-based income.

Interest expended comprises 64.45% of Total interest earned as compared to 64.33% for September quarter year-on-year. Total Operating Expenses comprise 27.58% of Total Income as compared to 26.96% for September quarter year-on-year. Provisioning for NPA comes out to be 0.33% of Advances as compared to 0.27% previous year. Net Profit comes out to be 6.59% of Total Income at Rs. 4,023.84 crores vs 5.75% for September quarter year-on-year. Overall, the performance of SBI is better for the September quarter this year as compared to the previous year, except for the provisioning for NPA part. Despite that, Net Profit has been good.

Rs. In crores	Sep '13	Sep ' 14
Income
Interest earned
Interest/discount on advances/bills	34940.64	38282.96
Income on Investments	11414.56	12540.67
Interest on balances with Reserve Bank of India and other interbank funds	258.38	265.46
Others	312.54	242.64
Total Interest earned (1)	46926.12	51331.73
Other Income(2)	6171.87	9766.94
Total Income (1+2)	53,097.99	61,098.67
Expenditure
Interest expended (3)	30186.51	33084.39
Operating Expenses
Employee cost	7,652.91	7364.2
Other Operating Expenses	6,660.63	9488.53
Total Operating Expenses(4)	14,313.54	16,852.73
Total Expenses(3 +4)	44,500.05	49,937.12
OPERATING PROFIT	8597.94	11161.55
Provision (NPA)	3,761.68	5275.91
Provision (other)	642.15	385.99
Total	4403.83	5661.9
Profit from Ordinary Activities before tax	4,194.11	5,499.65
Taxes	1025.49	1375.94
Net Profit from Ordinary Activities after tax	3168.62	4123.71
Share in profit of Associates	46.50	29.98
Less : Minority Interest	162.99	129.85
Net Profit after Minority Interest	3052.13	4023.84

Total Capital and Liabilities stand at Rs. 24,88,029.17 crores as of September quarter for the financial year 2015. Deposits comprise 77.42% of Total Capital and Liabilities for the September quarter this year as compared to 76.62%. Borrowings have dropped to 9.05% of Total Capital and Liabilities vs. 10.06% for the same quarter year-on-year. On the asset side, advances have dropped down to 63.40% of Total Assets as compared to 64.38% for the same quarter year-on-year. Investments have increased to 27.27% of Total Assets vs. 25.50% for the same quarter previous year. This indicates the relative stability of the Balance Sheet of SBI.

Rs. In crores	Sep ' 13	Sep '14
Capital and Liabilities
Capital	684.03	746.57
Reserves & Surplus	135750.11	155762.37
Minority Interest	4793.78	5262.76
Deposits	1731410.49	1926215.55
Borrowings	227214.67	225135.42
Other liabilities and provisions	159836.69	174906.5
Total Capital and Liabilities	2259689.77	2488029.17
Assets
Cash and Balances with RBI	81750.84	93105.74
Balances with Banks and money at call and short notice	62652.15	60680.02
Investments	576180.27	678457.02
Advances	1454800.24	1577336.88
Fixed Assets	10064.24	11236.61
Other Assets	74242.03	67212.9
Total Assets	2259689.77	2488029.17

The ratios for the September quarter are as follows:

	Sep '13	Sep ' 14
Efficiency ratio	0.2696	0.2758
Overhead ratio	0.0066	0.0068
NIM	0.0080	0.0077
Return on average asset	0.0244	0.0246
Return on earning asset	0.0254	0.0256
Non income interest to average asset	0.0028	0.0039
Loan/Deposits	0.8359	0.8189
Liquid Asset/ Deposit	0.0236	0.0315
Common equity/Earning asset	0.0630	0.0657
Interest earned/Earning asset	0.0224	0.0215

Efficiency and overhead ratios have deteriorated in the current quarter. NIM has also gone down. Return on average asset and earning asset are more or less the same. Liquid Asset/Deposit has improved in the current quarter.

It is our assumption that things are going to improve down the line. With the lowering of interest rates due to inflation coming down, credit offtake will increase. We have used Discounted Cash Flow method to arrive at valuation for State Bank of India. Our estimated price is coming out to be around Rs. 450. The Current Market Price of SBI is Rs. 334.45.

Projected Balance Sheet for Next 5 years

Rs. in crores	2015	2016	2017	2018	2019
CAPITAL AND LIABILITIES
Capital	746.57	746.57	746.57	746.57	746.57
Reserves & Surplus	159377.98	173849.49	190266.82	208888.65	230008.03
Minority Interest	5544.50	6264.32	7079.83	8003.74	9050.46
Deposits	2083158.61	2359922.92	2673457.58	3028647.83	3431027.95
Borrowings	252719.07	285528.50	322699.53	364811.67	412521.38
Other Liabilities and Provisions	204526.81	231079.65	261162.36	295243.92	333855.63
TOTAL	2706073.54	3057391.44	3455412.68	3906342.38	4417210.02
ASSETS
Cash and Balances with Reserve Bank of India	128862.04	145591.65	164545.25	186018.32	210345.62
Balance with banks and money at call & short notice	59933.60	67714.52	76529.82	86516.92	97831.52
Investments	653701.45	738568.71	834718.00	943648.30	1067057.70
Advances	1782539.89	2013959.38	2276143.22	2573178.81	2909696.62
Fixed Assets	11926.44	13474.80	15229.00	17216.37	19467.91
Other Assets	69110.11	78082.38	88247.40	99763.65	112810.64
TOTAL	2706073.54	3057391.44	3455412.68	3906342.38	4417210.02

Projected Income Statement for Next 5 years

Rs. in crores	2015	2016	2017	2018	2019
Income
Interest earned	212366.60	239851.44	270990.32	306268.73	346236.65
Other Income	42551.54	48058.63	54297.87	61366.55	69374.85
Total Income	254918.14	287910.06	325288.19	367635.27	415611.50
Expenditure
Interest expended	136452.75	154112.70	174120.49	196788.06	222468.81
Operating Expenses	71179.68	80391.87	90828.80	102653.19	116049.39
Provisions & Contingencies (include taxes)	31010.23	35023.63	39570.60	44722.03	50558.23
Total Expenses	238642.67	269528.20	304519.89	344163.29	389076.43
Net Profit for the Year	16275.47	18381.86	20768.30	23471.99	26535.07
Less : Minority Interest	633.43	633.43	633.43	633.43	633.43
Add: Share Of P/L Of Associates	0.00	0.00	0.00	0.00	0.00
Net P/L After Minority Interest & Share Of Associates	15642.04	17748.43	20134.87	22838.56	25901.64

 

About the Author

This report has been authored by Rohit Chaudhary. Rohit is pursuing his MBA in Finance from Institute of Management, Nirma University, Ahmedabad, Gujarat, India. Prior to this Rohit was working Accenture for past 2 years.

Disclaimer

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The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only.