Fresh investments can be considered in the State Bank of India stock. Beaten down valuations, SBI’s increasing market share in deposits, which gives it leeway to reduce costs, and higher pricing power to attract borrowers make the PSU banking giant a good investment option.
SBI’s mammoth branch network (most of it already under Core Banking Solutions), increasing contributions from fee-based activities, comfortable capitalisation, a well-diversified loan book and high proportion of low-cost deposits (36.7 per cent of total deposits) are other advantages for SBI. At current market price of Rs 952, the stock trades at less than its expected FY09 book value of Rs 965 and at 7 times its trailing one-year standalone earnings.
SBI has grabbed the first mover advantage in reducing lending rates. Having pegged its home loan rates at 8 per cent for the first one year (loans less than Rs 20 lakhs), it also cut rates on SME, auto and secured farm loans. While this may aid growth in the advances book, it may not significantly reduce margins as SBI’s cost of deposits (5.95 per cent for December quarter) is significantly lower than the yields from these advances. Higher lending volumes may also more than compensate for the lower rates, maintaining profitability.
For the first nine months of this fiscal, SBI’s net profit grew by 31.6 per cent, even as net interest margins were maintained at 3.16 per cent, due to higher yield on assets. The increase in other income was aided by service charges and treasury gains. The credit-deposit ratio of the bank fell from 71 per cent to 67.6 per cent for the quarter ended December 31, 2008 partly due to the huge surge in deposits as investors found the bank to be a safe haven.
SBI’s deposit growth (36 per cent in a year), unlike its peers, outpaced loan growth (29 per cent). Though recent deposit rate cuts will be reflected only with a lag, high CASA allows the bank considerable leeway in reducing lending rates. SBI’s asset quality slippages are not low, with gross non-performing assets at 2.6 per cent of the total assets. Lesser provision coverage of 48.4 per cent also limits the shield against future slippages. The bank has already restructured some SME accounts and may have to restructure more advances. T
he credit card defaults of the bank have put further pressure on the asset quality. In the current context, the next 2-3 quarters may see some slippage in the asset quality, but this is unlikely to lead to a systemic crisis. Though fee income may sustain, treasury gains may be limited by hardening bond yields. Consolidation of all State Bank subsidiaries will help the bank corner more than a quarter of share in total banking business.
M.V.S Santosh Kumar