>STATE BANK OF INDIA (IIFL)

The Banker to Every Indian

SBI’s focus on rapid network expansion and gaining market share has yielded results over the past two years. With 100% of its expansive branch network now linked to a common technology platform, a major constraint vis-à-vis new generation private banks is removed. The declining trend in ROE was arrested last year but the bank still lags other major government banks in this respect. Asset quality deteriorated last year and provisioning will likely remain high in the coming years. The six associate banks are in good shape and a consolidation would add value to the SBI Group. Despite the recent run-up in the stock price, valuations remain inexpensive at 1.2x core book. ADD.

Rapid network expansion: SBI is in an expansion mode, having expanded it’s domestic branch network by over 1,200 branches during FY09 (461 branches were added on account of merger of State Bank of Saurashtra), compared to the addition of 1,200 branches in the previous nine years (FY99-FY08). SBI Group (SBI & six associate banks) have combined branch network of 16,055 branches and more than 11,300 ATMs. This rapid expansion seems to be driven by a strategy to increase market share of deposits and garner more low-cost funds. SBI has also achieved 100% computerisation of all its branches, which should help improve customer service and MIS. The bank recruited 33,703 employees during FY09, most of which were clerical, which seems excessive despite the branch expansion and considering the bank’s already low assets/employee ratio.

RoE on a declining trend: SBI’s RoE declined from 19.7% in FY04 to 17.1% in FY09, primarily owing to decline in leverage (assets/equity) from 21x in FY04 to 16x in FY09. Moreover, the bank’s ROE is lower compared to other major government banks because of SBI’s lower NIM and higher operating costs, as demonstrated by the ROA tree analysis.

Associates Banks are in good health: All the six associate banks are in good health with stable RoE, low level of net NPLs and adequate Tier-1 ratio. Associate banks contributed to 24% of consolidated assets and 23% of consolidated profits. State Bank of Saurashtra was merged with SBI in August 2008. We believe the merger of the other six associate banks with the parent is desirable and would make the SBI Group stronger. Among the other major subsidiaries, SBI Cards and SBI Life Insurance reported losses for FY09.

To see full report: SBI