State Bank of India, with its massive network of 22,580 branches and a market share of 23 per cent in deposits and 19 per cent in advances, truly is ‘the banker to every Indian’. But is it the bank for every portfolio?
The bank has displayed exemplary performance in the last five years, recovering from the distress of the pandemic years. It has now evolved to exhibiting scale as a public sector bank would and efficiency as a private bank would. The share price has captured it well, growing over five times from the lows of May 2020. Going by a conservative sum of the parts valuation, there is room for an upside, that leaves investors with an opportunity to profit when accumulated on dips.
While some of its peers struggle with high credit-deposit ratios (CDRs), SBI enjoys an edge over them, with its CDR as low as 77.8 per cent (including domestic and foreign operations). This means that loan growth for SBI should not be a hassle, relative to its peers. With the stake-sale of Yes Bank in advanced stages and the possibility of subsidiaries getting listed in the medium-to-long term, there can be considerable value unlocking.
However, investors need to be wary of the possibility of a NIM (Net Interest Margin) compression, driven by higher cost of funds, due to borrowings trending up. The bank has raised ₹38,100 crore in FY24 and ₹10,000 crore in FY25 so far, through issue of debt securities. This apart, the board has approved the raise of another ₹25,000 crore. As a result, the debt to assets ratio (standalone) has trended up to 9.5 per cent as of Q1 FY25 from 8 per cent as of FY20.
Turnaround
FY20 was a year marked by a Gross NPA ratio of 6.2 per cent, credit cost (provisions and write-offs as a percentage of advances) at a whopping 1.9 per cent and a meek RoA (Return on Assets) of 0.38 per cent. Since then, the bank has staged a brilliant turnaround, driven by massive improvements in asset quality.
GNPA ratio in the agri, SME and corporate portfolios have been brought down from 16 per cent, 9.4 per cent and 9.7 per cent (FY20) to 9.6 per cent, 3.8 per cent and 2.5 per cent (FY24) respectively. Credit cost has declined from 1.9 per cent (FY20) to 0.3 per cent (FY24). The slippage ratio has improved substantially and the cost to income ratio has trended downward to below 50 per cent in FY24 (excluding wage revision and one-time items) from 52.5 per cent in FY20. Consequently, net profit has grown over four times and RoA and RoE have risen from 0.4 per cent and 7.7 per cent to 1 per cent and 20.3 per cent respectively between FY20 and FY24.
These improvements in efficiency have come not at the cost of growth though. Both credit and deposit growths have come in at a CAGR of about 11 per cent between FY20 and FY24, which are at par with the growth rates posted by all scheduled banks together.
All is not rosy though. The NIM (domestic), which reached a peak of 3.6 per cent in FY23, has been trending downward since. This is because, cost of deposits (domestic) which bottomed out at 3.8 per cent in FY22, has risen to 5 per cent as of Q1 FY25. An examination of the deposit profile reveals that the growth in deposits mentioned above has been driven largely by term deposits. Term deposits have grown at 12.9 per cent CAGR, while the low-cost CASA (Current Account, Savings Account) deposits have grown at 8.3 per cent CAGR between FY20 and FY24.
Takeaways from Q1 FY25
The bank posted a good set of numbers in Q1 FY25. Credit grew at 15.4 per cent year on year and deposits at 8.2 per cent. However, domestic NIM tapered to 3.35 per cent (3.22 for domestic + foreign) from 3.43 per cent (3.28 for domestic + foreign) as of Q4 FY24, owing to domestic cost of deposits growing to 5 per cent (highest in the periods analysed).
The management is sanguine about a credit growth of 15 per cent in FY25, while keeping the domestic CDR between 70 per cent and 72 per cent. Domestic CDR is at 69.3 per cent now (77.8 per cent including foreign operations). They also expect the NIM to stay at current levels, with a 10 bps variance. This is after considering the possibility of rate cuts.
A couple of factors can work in SBI’s favour here. First, the bank has excess SLR (Statutory Liquidity Reserves) of ₹3.7 lakh crore (equivalent to 10 per cent of gross advances). Also, with the introduction of special tenor deposits, the bank can comfortably grow the loan book, keeping the CDR intact.
Second, a large proportion of the bank’s loans (36 per cent) is linked to MCLR (Marginal Cost of Lending Rate) and MCLR-linked loans make the largest part of the pie. What this means is that, since MCLR pricing is based on the cost of deposits, the bank can transmit the increased cost of deposits to borrowers. The bank has also raised MCLR rates for various tenors from 5 bps to 10 bps in July. This will help defend the NIM, provided the cost of recent borrowings does not play spoilsport.
Subsidiaries
The stock of SBI derives substantial value from its key subsidiaries, which are growing rapidly (see accompanying table). SBI Life Insurance has delivered a 22 per cent CAGR in embedded value and 19 per cent CAGR in gross written premiums between FY20 and FY24. SBI Cards & Payment Services has grown its receivables by a CAGR of 20.5 per cent (FY20 to FY24) and net profit at a CAGR of 18 per cent. SBI Mutual Fund hasn’t failed to capitalise on the rising retail flows. Its QAAUM (Quarterly Average Assets Under Management) has exhibited a CAGR of 25 per cent (FY20 to FY24), and the company has kept its market leadership with a 17 per cent share. Its net profit has showcased a CAGR of 36 per cent.