Representational Image
Representational Image
Photo: PTI

State Bank of India’s origins go back to 1806 AD with the establishment of Bank of Calcutta (three years later as Bank of Bengal) as one of the 3 presidency banks, the other two being Bank of Madras and Bank of Bombay. The three banks were then amalgamated to form the Imperial Bank of India in 1921. The Imperial bank in its short tenure of three & a half decades, grew to 172 branches before its significant controlling stakes were passed on from the RBI to the Government of India.

The bank’s total revenue (interest income) stood at INR 2,42,869 crore and had a net income interest of INR 88,349 crore for FY19. The bank has an employee strength of 2,57,252 at the end of March 2019 and is categorized by RBI as a domestic systemically important banks (D-SIBs). The bank has numerous subsidiaries operating in the businesses of insurance, AMC, securities, investment banking, home financing, overseas banking & financing operations and benefits from the cross-selling of several products to its large customer base. State Bank of India has been known as the banker to every Indian with a customer base of 435 million-plus by end of March 2019.

After a significantly low credit growth in the last couple of years, the banking industry’s credit growth has picked up in FY19, due to a strong revival in credit to the corporate sector driven largely by Government investment and continued demand from personal loan segment. In line with all scheduled commercial banks (ASCBs) double-digit credit growth, the bank’s domestic advances grew by 13.99% to Rs 19,90,746 crore, while the foreign offices' advances grew by 0.23% to Rs 3,02,708 crore. Therefore, the gross advances of your Bank grew by 11.96% to the level of Rs 22,93,454 crore in March 2019. However, the bank’s loan book growth remained flat for the H1FY20 owing to the fall in the sequential growth of corporate and Small and Medium Enterprises (SMEs) portfolio. The robust growth of 18.9% on a YoY basis and 3.3% on a QoQ for the retail segment signify the bank’s ability to grow at a rate of higher double-digit numbers. With the retail comprising of only 32% of the overall loan book mix, the decrease in advances towards corporates and SMEs in H1FY20 could not be compensated.

In the year 2019, the bank’s total deposits grew by 7.58% to Rs 29,11,386 crore from the previous year’s level of Rs 27,06,343 crore. The domestic deposits grew by 8.27%, while there was a contraction in deposits of foreign offices by 9.17%, due to the formation of subsidiary State Bank of India (UK) Ltd and transfer of the Bank’s existing business to the same. The growth in domestic deposits was mainly due to robust growth in CASA deposits, which grew by 8.42%. The Bank’s overall CASA ratio improved from 45.68% in FY18 to 45.74% in FY19. SBI has a deposit base of Rs 30,00,000 crore as of Sept 2019, with a CASA ratio of 43.7%. The CASA is majorly dominated by the healthy amounts of saving account deposits from its large customer base and term deposits of mostly the same customers due to the higher interest rates offered by the bank.

The Bank’s investment portfolio has declined to Rs 9,78,124 crore (domestic portfolio was Rs 9,26,651 crore and the foreign portfolio was Rs 51,473 crore) in FY19 compared to Rs 10,73,097 crore in FY18, due to picking up in the corporate lending coupled with the calibration of term deposit rates to ensure a more optimal Asset Liability structure.

The bank like most other banks is gradually increasing its retail mix in its credit book on a sequential basis with the personal retail loans making 31.9% as of Q2FY20 of the overall loan book of the bank. The bank has increased its retail mix of the credit book from 27% in June 2017 to 32% by September 2019. This increase has come against moderate growth in the SME and Agri portfolios while corporate lending has remained muted below 10% annual growth. This gradual shift in the loan book mix is attributed to the lesser NPA levels for the personal retail loan segment but higher NPA levels for the corporate segment.

The SBI group has modest asset quality, which has deteriorated in the past few years. This is reflected in the bank's gross non-performing assets (NPAs) of 7.19% as of September 2019 (7.53% as of March 2019). The high level of gross NPAs was mainly on account of pressure on asset quality, mainly in the large- and mid-corporate loan book, including that of associate banks, now merged with SBI, given the challenging macroeconomic environment. In FY19, asset quality improved and the slippage ratio stood at 1.60% in FY19, down from 4.85% in FY18. The pace of slippages to NPAs is expected to reduce as the bank has recognised the bulk of the stressed assets in its corporate exposure. Its ability to improve resolution and recovery and asset quality performance in the agriculture and MSME sectors will remain a key monitorable.

SBI had adequate capitalisation, indicated by Tier-I and overall capital adequacy ratio (CAR; under Basel III) of 11.31% and 13.59%, respectively, as on September 30, 2019. SBI received an equity infusion of Rs 8,800 crore and Rs 5,681 crore from the Government of India (GoI) in FY8 and 17, respectively. Furthermore, the bank raised equity capital of Rs 15,000 crore through the qualified institutional placement (QIP) route in June 2017. However, given its large scale of operations, the SBI group will continue to need steady capital infusion to support growth and meet capital requirements as per the Basel III guidelines.

SBI has the largest number of salaried savings accounts mostly comprising of the PSU employees which have helped maintain strong CASA levels for the bank. With the interest rates linked with the falling repo rates and abundant liquidity available with the bank, deposit rates can go below 3% in the future.

The digital payments landscape in India is evolving rapidly and SBI is playing an effective role in building momentum for transforming India through the digitalisation of the economy. In sync with the Government of India to create a less-cash economy, the Bank has expanded its digital footprint across the length and breadth of the country. YONO is the flagship customer-facing digital Bank caters to various banking, financial services, lifestyle requirements and delivers world-class customer experience through distinctive omnichannel and seamless customer journeys. It is also an employee-facing platform that enables end-to-end digitisation of regular banking services. YONO has already generated significant value for the Bank in terms of business growth, new customer on-boarding and customer engagement. It has achieved 2 crore downloads and approximately 73.49 lakh registrations to date as updated in their 2019 annual report and over 10 lakh users log in on a daily basis.

SBI Cards has been growing its subscriber base by more than 30% annually over the last 3 years while other banks are also competing in the same space. However, with a customer base of 43 crore, benefits of balance payments of other banks credit cards, and tie-ups with merchant banking partners, SBI Cards is likely witness the fastest growth among other credit card companies in the coming years.

Recently, the bank announced a Rs 7,250 crore fund infusion into the crippled Yes Bank under which it will pick up to 49% equity in the fourth largest private sector lender. The fund infusion is part of the Reserve Bank-mandated rescue plan. Under the reconstruction scheme, SBI cannot reduce its holding below 26% for the next three years. SBI Chairman Rajnish Kumar said that the bank's capital infusion into rescuing Yes Bank would have a "very marginal" impact on SBI's capital adequacy ratio.

The EMI relaxations and moratoriums provided by the Centre in order to lessen the financial stress on individuals due to the coronavirus lockdown has had no effect on the fiscal condition of banks said the Chairman. He further said that as not everyone has opted for the moratorium there will be no impact on the liquidity as well as on the earnings of the bank.

However, the suspension of fresh initiation of insolvency proceedings of upto 1 year depending upon the pandemic situation can a bit negative for all the banks as the banks will be deprived of a credible mode of bad debt resolution.

For the nine months ended 31 December 2019, State Bank of India's interest income increased 9% to Rs 2.04 Trillion. Net interest income after loan loss provision increased 54% to Rs 524.78 Billion. Net income before extraordinary items increased from Rs 10.55 Billion to Rs 162.5 Billion. Net interest income after loan loss provision reflects Interest or discount on advances or bill increase of 16% to Rs 1.413 Trillion, Interest on Balances with Reserve Bank increase from Rs 9.05 Billion to RS20.77 Billion.

If you look at the financials, the bank's net interest margin has shown a consistent performance of above 2.50% in the last 5 years. The Bank has also reported improvement in its loan and deposit growth too. The provisions of the bank are also close to 3% in the last 5 years as compared to the industry median of 1.10% which is a healthy sign.

Key Risks:

Macroeconomic slowdown can drag consumption demand to new lows

Heavy fresh slippages from the big-ticket corporate portfolio

Unfavourable economic development like GDP growth not picking up

Fall in repo & bank rates to such levels that affect the spreads of the bank.

Final Thoughts:

State Bank of India has been the benchmark of public sector banks in India with the largest branch network, number of customers, total book size, and providing all banking services possible. The bank can become more profitable going ahead rather than aggressively growing its book size. With +22,000 plus branches across the nation, robust growth in the retail personal segment, adequate liquidity available, stable CASA levels, and high level of provisioning already done, the NIMs and profits for State Bank of India to improve further.

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