State Bank of India Note: No portion of this document may be copied and/or reproduced. Subject to plagiarism regulations.
Introduction STATE BANK OF INDIA (SBI) is a Multinational banking and financial services company based in India. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. Largest Public sector Bank in India (Deposits, Advances, Branches, employees) 31.90 Lakh crore Business Size, 59000+ Pan India ATM network, 30.12 crore+ Active Customer Base and 2.55 crore+ Internet Banking users
STRENGTHS India s largest bank Early adopter of technology among PSBs: Account can be opened in 15 minutes through sbiintouch digital bank, first of its kind in India Biggest branch network at 16000+ branches and strong rural reach Diversified across consumer banking, enterprise banking, insurance etc., Good brand visibility due to extensive marketing. WEAKNESSES International presence is less compared to international banks Non-performing assets(npas) Government control and red-tapism OPPORTUNITIES Access to talent pool to replace the going top management to serve the next generation With focus on India going cashless, the bank can dominate the market with its extensive reach Mergers of associate banks with SBI International expansion THREATS New bank licenses by RBI can affect operations Consolidation among private banks can reduce market share for SBI Advent of MNC banks Expansion of private banks into semi-urban and rural areas
Capital Adequacy Ratio(CAR) CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-weighted assets Year CAR Composition: March 2012 13.86% March 2013 12.92% March 2014 12.96% March 2015 12.00% March 2016 13.12% Dec 2016 13.73% Tier 1 Capital: Common share plus surplus Retained Earnings Goodwill and intangibles Deferred Tax assets Regulatory Adjustments Tier 2 Capital: Bonds issued through private placement Other holdings Risk Weighted Assets: Credit risk weighted assets (~83%) Market risk weighted assets (8%) Operational risk weighted assets (9%) Mar 2016: Tier 1 Capital = Rs 133035 Cr; Tier 2 = Rs 42868Cr
Capital Adequacy Ratio(CAR) CAR OF TOP BANKS A X I S B A N K 15.30% H D F C B A N K 15.50% I C I C I B A N K 16.22% P N B 11.58% B A N K O F B A R O D A 14.09% C A N A R A B A N K 12.11% Above: CAR trend of SBI from Mar 2012 to Mar 2016 Right: CAR comparison of SBI vs other banks, Q1FY2017 S Y N D I C A T E B A N K S B I 11.00% 14.01%
Capital Adequacy Ratio(CAR) BASEL III norms: minimum 8% RBI norms: Minimum 9% for Indian scheduled commercial banks Minimum 12% recommended for Indian public sector banks The recent NPA issue has caused SBI to increase its capital requirements. As a result, SBI s CAR has seen a steady growth from 12% in March 2013 to 13.73% in December 2016. This is mostly as a result of new bond issues. Further capital infusion of Rs 15000 Crore will be done in next fiscal through Institutional Placement, FPO and rights issue.
Asset Quality The quality of assets is an important parameter to examine the degree of financial strength. The foremost objective to measure the assets quality is to ascertain the composition of non-performing assets (NPAs) as a percentage of the total assets. The following ratios are considered Net NPAs to Net Advances: It is the most standard measure to judge the assets quality, measuring the net nonperforming assets as a percentage of net advances Net NPAs to Total Assets: This ratio reflects the efficiency of bank in assessing the credit risk and recovering the debts. In this ratio, the Net NPAs are measured as a percentage of Total Assets. The lower the ratio reflects, the better is the quality of advances Total Investments to Total Assets Ratio: This ratio indicates the extent of deployment of assets in investment as against advances. This ratio is used as a tool to measure the percentage of total assets locked up in investments. A higher ratio shows the conservative policy of a bank to provide safeguard to the investments against NPAs. Percentage Change in Net NPAs: This ratio measures the movement/trend in net NPAs in current year in relation to net NPAs in the previous year. The higher the reduction in net NPAs levels reflect, the better is for the bank.
Asset Quality
Efficiency is the most forward-looking indicator of condition and a key determinant of whether a bank possesses the ability to correctly diagnose and respond to financial stress. The management component provides analyst with an objective, and not purely subjective, indicators. Reflected in this component rating is both the board of directors' and management's ability to identify, measure, monitor, and control the risks of the bank's activities, ensure its safe and sound operations, and ensure compliance with applicable laws and regulations. The following ratios are considered Business Per Employee : Business per employee describes the level of overstaffing or understaffing based on revenues. Net Profit Per Employee: Net Profit per Employee reflects the banks ability towards efficiency of the bank Credit Deposit Ratio (Loan to deposit ratio) : Credit to Deposit Earning indicates the ability to convert deposit into higher earning loans Return On Net Worth (%): Return on Net Worth examines the proportion of Bank s Net Income to Total Shareholder's Equity.
Efficiency
Earnings Quality Measure of the institution s ability to expand, retain competitiveness and add capital PARAMETER 2014-15 2015-16 ROE 10.62% 7.3% ROA 0.68% 0.44% ROCE 8.68% 6.19% Net Interest Margin(x) 2.68 2.51 PAT/TOTAL ASSETS 0.44% 0.64% OPERATING PROFIT/ AVG WORKING FUND 6.9% 10.2%
Earnings Quality Measure of the institution s ability to expand, retain competitiveness and add capital The decline in ROE and ROA has been entailed by higher provisioning for bad loans. The rising stress on this front seems to have plateaued, leading SBI to be optimistic of the near future. Consistent growth in ratios over the years bucked by the 2015-16 numbers show commitment for financial prudence and fair accounting practices. There has been an increase in working funds available over the year, that has more than compensated the higher contra asset load.
Liquidity Ratios Primarily targeted at the evaluating, monitoring, and controlling balance sheet risk 0.9 0.8 0.7 0.6 While SBI s liquidity ratios have shown a small dip as a whole, they still present the picture of a bank poised to service Indian banking needs in an efficient way. 0.5 0.4 0.3 0.2 0.1 0 Government Securities/Total Investments Government Securities/Total Assets Liquid Assets/Total Assets Liquid Assets/Total Deposits 2016 2015 Cash to deposit
Sensitivity Sensitivity covers how particular risk exposures can affect institutions. Beta (co-variance) calculated with respect to SENSEX data Clear indication that beta has improved dramatically over the last 3 financial years, which implies relatively lower volatility
Interest Sensitivity Gap Refers to the difference between interest-sensitive assets and interest-sensitive liabilities maturing or repricing within a specific time interval. ISG > 0 or ISG Ratio >1 Positive Gap ISG < 0 ISG or Ratio < 1 Negative Gap
Findings: Interest Sensitivity Gap SPAN TYPE of GAP Recommended Action SHORT TERM LONG TERM NEGATIVE GAP/ LIABILITY SENSITIVE POSITIVE GAP/ ASSET SENSITIVE -Increase interest Sensitive Assets -Decrease interest sensitive Liabilities -Increase interest Sensitive Liabilities -Decrease interest sensitive Assets
Measurement of sensitivity of market value of net worth to interest rates. Signifies the average maturity of a promised stream of cash flows Being the largest Indian bank, in terms of assets, SBI stands to benefit from effective duration gap management Rise in Interest rates Fall in interest rates Positive gap Fall in net worth Gain in net worth Negative gap Gain in net worth Fall in net worth
Implications: A slightly positive duration gap offers reasonable immunization from interest rate fluctuations. At the same time, it allows SBI to be prepared to gain a windfall from rate cuts A gradual shift towards long term liabilities is in line with SBI s slated goal of a small positive duration gap A cut in rate of 25 basis points would lead to a gain of 280000 crs in net worth
We have now entered the last lap. Merger will create a stronger, more efficient (and) vibrant entity... - Arundhati Bhattacharya, Chairman, SBI Merger of SBI with its subsidiaries Merger of SBI with its subsidiaries (State Bank of Patiala, Hyderbad,Mysore, Travancore, Bikaner &Jaipur) Important step towards strengthening the banking sector through consolidation of public sector banks Indradhanush action plan of the government,expected to strengthen the banking sector and improve its efficiency and profitability Will help in strengthening SBI s position as a global player 50 crore customers and an asset base of Rs 37 lakh crore. Mammoth network of 23,000+ branches, further enhancing its dominance Recurring savings, estimated at more than Rs 1,000 crore in the first year through a combination of enhanced operational efficiency and reduced cost of funds
Synergy of operations can be achieved; operational efficiency and economies of scale. Minimisation of vulnerability with respect to any geographic concentration risks faced by the subsidiary banks Focussed monitoring and control over cash flows, instead of separate monitoring by six different banks Improved risk management and unified treasury operations Fresh Capital Issue SBI to raise 15,000 crore capital next fiscal Funds would be issued through institutional placement, rights issue or through FPO (Follow-on Public Offer) Shares of SBI closed at Rs 277.40, up 0.98 per cent over previous close on the BSE. (15 March 2017) Capital adequacy ratio will rise This will enable SBI to give out more loans in the coming years SBI is looking towards expanding its footprint into the global market It's a step closer to joining the ranks of the top 50 global banks, as SBI's global ranking would improve to 45th largest from 52nd position it holds currently.
References The Economic Times Investopedia Yahoo Finance Google Finance SBI Annual Reports Moneycontrol SBI Company website Investor Relations
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