State Bank of India Equity Research

Date of Research – 21 January 2016

Price – Rs. 175.65

About the Company

State Bank of India (“SBI” or the “Bank”) was incorporated in the year 1955. The Bank traces their ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making them the oldest commercial bank in the Indian Sub-continent. The Government of India nationalized the Imperial Bank of India in the year 1955, with the Reserve Bank of India taking a 60 % stake, and name was changed to State Bank of India.

SBI provides banking services primarily to retail and corporate clients in India. In addition to the banking services, the Bank through their subsidiaries, provides a range of financial services, which include life insurance, merchant banking, mutual funds, security trading, and pension fund management. In the year 2001, the SBI Life Insurance Company was started by the Bank. They are the only Bank that have been permitted 74 % stake in the insurance business. The Bank’s insurance subsidiary ‘SBI Life Insurance Company’ is a joint venture with Cardif S.A in which Cardif holds 26% of the stake.

For FY 2017, SBI’s net interest margins stood at a 2.84 % (2.96 % for FY 2016). Total deposits with the bank stood at Rs. 20,44,751 Cr. as compared to Rs. 17,30,722 Cr. growing by 18.14 % over the previous year. For the same period, net NPA’s stood at 3.71 % (3.81% for FY 2016).

CASA share in Total Deposits stood at 45.58 % as at the end of March 31, 2017.

* SBI splits its equity shares in the ratio of 10:1 on 20 Nov 2014. EPS and P/E figures are adjusted to give effect to the split.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Interest earned 1,67,978.14 1,89,062.43 2,07,974.34 2,21,854.84  2,30,447.49
Interest expended 1,06,817.91 1,21,479.04 1,33,178.64 1,43,047.36  1,49,114.67
Net Interest Income 61,160.23 67,583.39 74,795.70 78,807.48  81,332.82
Other income 32,581.69 37,882.13 49,315.17 51,016.19  68,192.96
Operating expenses 52,819.80 63,368.74 73,848.01 73,717.07  87,290.07
Operating Profit 40,922.12 42,096.78 50,262.86 56,106.60  62,235.71
Provisions (other than provisions for tax) and contingencies 15,040.31 20,771.24 24,408.29 37,929.82  61,290.88
Exceptional items – 
PBT 25,881.81 21,325.54 25,854.57 18,176.78  944.83
Tax 7,558.82 6,836.07 8,337.20 5,433.50  1,335.50
PAT (before Minority Interest and share of Associates) 18,322.99 14,489.47 17,517.37 12,743.28  (390.67)
Profit/ (loss) attributable to Minority Interest 638.44 633.43 837.51 794.51  (338.62)
Share of profit / (loss) of Associates (231.68) (317.73) (314.44) (275.82)  (293.28)
Consolidated Profit / (Loss) for the year 17,916.23 14,173.77 16,994.30 12,224.59  241.23

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Profit Margin Ratio 9.14 6.38 6.81 4.67  (0.13)
Cost to Net Income Ratio 56.35 60.08 59.50 56.78  58.38
Other Income to Net Income Ratio 34.76 35.92 39.73 39.30  45.61

Net profit margin is arrived at by dividing profit after tax by the total income generated (i.e. interest earned plus other income) and shows what is left for the shareholders as a percentage of total income.

Cost to net income ratio is particularly important in valuing banks. It is derived by dividing operating expenses by the net income generated (i.e. net interest income plus the other income). The ratio highlights the efficiency with which the bank is being run – the lower it is, the more profitable the bank will be. If this ratio rises from one period to the next, it means that costs are rising at a higher rate than income. Together these ratios help in understanding the cost and profit structure of the bank and analysing business inefficiencies.

Other income largely constitutes of fee income such as commission and brokerage fees and client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of credit and bank guarantees) etc. Banks in developed countries derive nearly 50% of their income from these non-funded sources. A high other income to net income ratio is good for the bottom line (i.e. net profit) as income from this stream is derived without significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 671.04 684.03 746.57 746.57 776.28 
Reserves & Surplus 1,05,558.97 1,24,348.99 1,46,623.96 1,60,640.97 1,79,816.09 
Net worth (shareholders funds) 1,06,230.01 1,25,033.02 1,47,370.53 1,61,387.54 1,80,592.37 
Minority Interest 3,725.68 4,253.86 4,909.15 5,497.12 6,267.40 
Deposits 14,14,689.40 16,27,402.61 18,38,852.36 20,52,960.79 22,53,857.56 
Borrowings 1,57,991.36 2,03,723.20 2,23,759.71 2,44,663.47 2,58,214.39 
Other liabilities and provisions 1,47,319.73 1,72,745.65 1,81,089.86 2,35,601.11 2,71,965.92 
Total Liabilities 18,29,956.18 21,33,158.34 23,95,981.61 27,00,110.02 29,70,897.64 


Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 7,407.97 9,369.93 10,559.78 12,379.30 15,255.68 
Cash and balance with RBI 79,199.21 89,574.03 1,14,095.60 1,44,287.55 1,60,424.57 
Balances with banks and money at call and short notice 48,391.62 55,653.69 53,065.74 64,299.02 43,734.90 
Advances 11,63,670.21 13,92,608.03 15,78,276.69 16,92,211.33 18,70,260.89 
Investments 4,60,949.14 5,19,393.19 5,78,793.09 6,95,691.75 7,05,189.08 
Other Assets 70,338.03 66,559.46 61,190.71 91,241.07 1,76,032.52 
Total assets 18,29,956.18 21,33,158.34 23,95,981.61 27,00,110.02 29,70,897.64 

Efficiency Analysis

Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Advances / Loan Funds Ratio 73.99 76.05 76.52 73.65 74.45 
ROE / RONW 14.44 14.33 9.62 10.18 6.54 

Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is able to deploy the funds it mobilises and is arrived at by dividing the banks total advances by its total deposits (i.e. deposits + borrowings). A high advance to loan fund ratio indicates that the bank might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be.

Return on Equity (ROE) or Return on Net Worth (RONW) : measures the amount of profit which the company generates on money invested by the equity shareholders (i.e. share capital + reserves and surplus). In short, ROE draws attention to the return generated by the shareholders on their investment in the business. ROE is widely used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Interest Income Rs. 61,160.23 67,583.39 74,795.70 78,807.48  81,332.82 
Growth (%) 5.67 % 10.50 % 10.67 % 5.36 %  3.20 % 
PAT (Rs. Cr.) 18,322.99 14,489.47 17,517.37 12,743.28  (390.67) 
Growth (%) 14.71 % (20.92 %) 20.90 % (27.25 %)  – 
Earnings Per Share – Basic (Rs. ) 26.68 20.40 22.76 15.95  0.31 
Earning Per Share – Diluted (Rs. ) 26.68 20.40 22.76 15.95  0.31 
Price to Earnings 7.77 12.75 11.70 12.18  – 

Dividend History

The Company has maintained an average dividend yield of 1.43 % over the last 5 financial years.

Liquidity and Credit Analysis

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Interest Margin Ratio (“NIM”) 3.34 3.17 3.16 2.96  2.84 
Capital Adequacy Ratio 12.51 12.44 12.00 13.12 13.11
Net NPAs 2.10 2.57 2.12 3.81 3.71 

NIM: Banks focus on lending or advancing money at a rate higher than the rate at which they accept deposits. Net Interest Margin is calculated by dividing the difference between Interest earned (on advances) and interest expended (on deposits) by the amount of (average) Invested Assets. If this ratio rises from one period to the next, it indicates that the bank is able to deploy its funds more efficiently which results in greater profitability.

Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a measure of a bank’s capital (net worth plus subordinated debt) expressed as a percentage of a bank’s risk weighted credit exposures (loans).

Two types of capital are measured: tier I capital, which can absorb losses without a bank being required to cease trading (such as ordinary share capital and free reserves); and tier II capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors (such as long term unsecured loans and revaluation reserves which is taken at a discount of 55 % while determining its value for inclusion in Tier II capital).

Measuring credit exposures requires adjustments to be made to the amount of assets shown on a bank’s balance sheet. This is done by weighting the loans made by a bank according to their degree of riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans to individuals are weighted at 100 %. Similarly off-balance sheet items such as guarantees and foreign exchange contracts are also weighted for their riskiness. On-balance sheet and off-balance sheet credit exposures are added to get total risk weighted credit exposures.

As per the Basel II norms the minimum capital adequacy ratios that apply are:

Tier I capital to total risk weighted credit exposures to be not less than 4 %;

Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to be not less than 8%.

The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is higher than the internationally prescribed percentage of 8 %.

Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system.

For details on classification of tier I and tier II see

NPA: Non Performing Asset or NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Any rise in the percentage of NPAs results in a sharp decline in the overall profitability.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, SBI reported a promoter holding of 62.22 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 28.73 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.