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State Bank of India - Fast Catching up with private banks
March 17, 2009 State Bank of India has caught up with its private sector counterparts, and how! While 5yr growth CAGR may seem poor at ~15%, FY08 has seen handsome spurts in growth. Interest Income and Total Income grew at over 30 percent. With the extensive deployment of its core banking technology and other technology initiatives, State Bank of India has now emerged as one of the most cost-efficient banks, beating its private sector counterparts HDFC Bank and ICICI Bank handsomely and rivalling the smaller and nimbler Axis Bank. While it boasts one of the highest RoEs at ~17%, the SBI stock is languishing currently (Mar 17 2009) at less than consolidated book -deserves close scrutiny to check if it's a potential bargain! 
Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderState Bank has its Capital Adequacy ratios at 12.64 percent, much above the mandatory 9 percent requirement stipulated by RBI. While Gross and Net NPAs (Non-Performing Assets) are still relatively high, its nice to see a focus on reducing Gross and Net NPA levels. These have been brought down sequentially, year on year, but rose marginally in FY08. FY08 Gross and Net NPAs stand at 2.62% and 1.44%, respectively. Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability. Generally investors should look for mid to high-teen returns on equity. It is easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, which can be unduly risky over the long term. For this reason, it is good to see a high level of return on assets as well. For Banks a top RoA is in the 1.2 to 1.4 percent rangeState Bank has been recording realtively high Return on Equity ranging from 16% to 22% in earlier years -due to high financial leverage employed. There are only three levers for boosting ROE -Net Margin, Asset Turnover and Financial Leverage. In State Bank of India case, both Net Margins and Asset Turnover is lower than other banks. It is the higher Financial Leverage that has been boosting up Return on Equity for SBI -which is not a very good sign. However to its credit, FY08 financial leverage is down to a more conservative 17x still at much higher levels than other banks like HDFC Bank (11.58x), Efficiency RatioThe efficiency ratio or cost to income ratio, measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)Cost Efficiency ratio has seen significant improvements in the last 2 years -FY08 cost-efficiency ratio stands at ~37 percent; beats its private sector peers Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.Net Interest margins have been generally consistent, around the 3 to 3.5 percent mark. FY08 has seen NIMs coming down a bit to 3.07 percent. Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthWhile 5yr growth CAGR may seem poor at ~15%, FY08 growth has been exemplary. Interest Income and Total Income growth stands at over 30 percent. State Bank of India crossed the milestone of 1 million Crores in Total Assets in FY08 while registering over 90,000 Cr in Total Revenues. Price to BookBecause a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.State Bank is currently (Mar 17, 2009) trading at 0.98 Consolidated Book Value, back at the levels last seen in FY2004. However State Bank of India is a much more efficient and competitive bank today with earning power rivalling the best of its private sector peers. With a low P/B relative to its peers and a high RoE, State Bank of India might be a potential bargain, but we will want to do some digging before making that assessment based solely on the price to book ratio. Overall verdictWorthy of further investigation. Calls for detailed scrutiny. If interested in Private Bank stocks in the Indian stock market, its time to get to |
