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State Bank of India (updated - Feb 2009)
With the rural economy largely neglected in the past, and the social obligation on PSBs to create deep inroads in these areas, has meant greater presence of PSBs. Here, State Bank of India (SBI) has one of the highest concentrations (around 70 per cent of its branches) in the rural and semi-urban regions (RSU) among all the banks. Rural lending and deposits as a percentage of total advances and deposits is broadly 30 per cent. With rural India gradually getting its share of attention, SBI should emerge as a key beneficiary.

Agriculture gross NPAs have historically been more than SBI’s average. However, with farm loan waiver, gross NPAs would
reduce. Greater technology usage, higher low-cost deposits from RSU areas (around 50 per cent as compared to SBI’s average CASA of 40 per cent) and government agreeing to pay interest on the farm loan waiver loan are also positives. Going forward, SBI intends to increase its branch strength in RSU areas from around 7,000 (13 per cent of industry) to around 10,000 by 2010. Plans are afoot to start an additional 126 rural credit processing centres to speed up rural financing in the key business hubs.

Likewise, the strength of its sales and recovery team is seen doubling to 6,000 by FY09. Clearly, the rural impetus is gaining momentum, and SBI’s initiatives should help increase credit as well mobilise savings in the RSU areas. The amalgamation of the efforts to shore up the branch network as well as manpower, would improve the business prospects as additional customers can
be roped. Meanwhile, the bank continues to do well urban centres as well, recording healthy growth in its business and financials.
source - BS

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State Bank of India (updated - 17 April 2009)
The State Bank of India (SBI) chief says the bank’s net interest margin (NIM) may have fallen to 3 per cent in the March 2009 quarter, from the 3.15 per cent level at the end of December 2008. That may not be a sharp drop but it’s a pity the bank hasn’t been able to manage the volatility in interest rates over the last six months. Given that it was getting money by the bagful — almost Rs 1,000 crore a day —it needed to drop deposit rates far more quickly than it has.

Even in the December 2008 quarter, the bank’s loan deposit ratio had slipped to around 74 per cent from 80 per cent at the end of the previous quarter. Since then, banks haven’t lent too much and the rate of growth of credit is down to about 19-20 per cent currently. SBI’s loan book too is unlikely to have seen too much growth, the chairman himself said recently that the response to the lower interest rates for mortgages and auto loans hadn’t exactly been overwhelming. So it’s hard to understand why the bank is mulling another cut in interest rates when it’s loans are already priced so competitively.

Of course, loan volumes may pick up but despite the lower cost of funds, the NIM could continue to be under pressure. The SBI chief says the bank should be able to turn in a NIMof 3 per cent this year, though analysts believe it could drop to 2.7per-cent levels. Also, in its bid to grow market share, SBI has lent aggressively in the three years to 2008-09, especially to the SME sector. With a huge part of its portfolio relatively unseasoned, the chances of non-performing loans (NPLs) piling up are high. Should that happen, the bank will need to make more provisions. As a result of this, and also because the growth in net interest income expected to taper off to less than 20 per cent and the growth in fees to 11 per cent, SBI’s net profit may well be under huge pressure in 2009-10. It’s not surprising that the stock has underperformed the market since the start of the year.
source - BS

State Bank of India (updated - 12 June 2009)
State Bank of India’s restructuring numbers have taken the Street by surprise. When the bank announced its annual results the number talked about was a reasonable Rs 8,000 crore. Now it appears that standard loans restructured amount to nearly Rs 13, 000 crore and taken together with pending applications is closer to Rs 21,600 crore or about 4 per cent of the loan book.

This number read with the gross non-performing assets(npas) of 2.8 per cent and a provision coverage of 40 per cent, perhaps the lowest among peers, is cause for concern and is bound to reflect in the higher cost of credit in the current year and possibly next year too.

Although by restructuring the loans, the bank will provide less in the next couple of years, the true quality of the assets will be seen after that. Also, what’s worrying is that a fair portion of the restructuring is believed to be on behalf of the SME sector. The bank has lent aggressively to this sector over the past three years and it now accounts for 17 per cent of the loan book.

Last year loans to SMEs were up 26 per cent while the total loan book grew 30 per cent. CLSA points out that SBI may look at raising capital in the next 12-18 months even though the reported capital adequacy ratio is a strong 14 per cent.

Going forward, SBI’s strong liability franchise-cheaper current and savings (CASA) accounts are growing with a share of 42 per cent---will help. And with interest rates easing, the marginal cost of borrowings should come down further.

SBI should not have a problem finding takers for its loans, now that the economy seems to be looking up. However, since the bank has been lending at lower rates, ahead of a cut in borrowing costs, the net interest margin (nim) will be under pressure.
In fact, the nim came off fairly sharply during the March 2009 quarter dropping 50 basis points sequentially to 2.3 per cent. Therefore, although the loan book should see fairly good growth this year, earnings are expected to grow by less than 10 per cent.
source - BS

State Bank of India (updated - 02 April 2009)
The news from the State Bank of India (SBI)is not encouraging. The chairman has indicated that there is some increase in non-performing loans and parts of the portfolio are under strain. Most important, it appears that the growth in credit in the March 2009 quarter has been lower than expected, atrend that might result in afurther cut in lending rates.

In fact, the teaser loans on a host of products including home loans and car loans don’t seem to have attracted many. That was to be expected as home buyers, in particular, are still waiting for realty prices to fall. But the lower loan growth together with a strong inflow of deposits into SBI, could mean pressure on the net interest margin, not just in the last quarter of 2008-09 but also in the current year. What’s worse, given the downturn, it’s almost certain that nonperforming loans (NPLS) will rise sharply.

In fact, the deterioration in the credit quality of loans and the need to increase provisions will mean higher costs of credit for the bank. SBI has stepped up lending in the last three years, a good part of it to SMEs, and as a result, much of its portfolio is unseasoned. The SME sector is typically worse off in a downturn which is why SBI could see a bigger rise in NPLS.

In this context, SBI’s loan loss coverage at 48 per cent is lower than its peer group. Macquarie expects SBI’s consolidated net profits to come off to around Rs 11,000 crore from around Rs 13,700 crore in the current year.
source - BS

State Bank of India (updated - 08 Dec 2009)
In among the few major steps taken by the UPA government after coming to power this year is the Cabinet’s clearance to the SBI Act (Amendment) Bill. The Bill seeks to lower the minimum government holding in SBI from 55 per cent to 51 per cent.

The Bill, if cleared, will enable the government to bring down its holding in the bank from the current level of 59 per cent. The move will ease the growth bottleneck being faced by SBI and help it raise capital through a follow-on public offer or a rights issue, while allowing the government to mop up the muchneeded funds. The former is more likely given that SBI will need capital in the next 12-18 months to sustain growth. At the current market price of Rs 2,325, a 10 per cent equity dilution will yield the bank about Rs 15,000 crore, which will give it the leeway to increase lending, say analysts.

Although SBI’s capital adequacy ratio (CAR) is a comfortable 14.11 per cent (in September 2009) with Tier-1 capital at 9.84 per cent as against the Reserve Bank of India (RBI) mandate of 6 per cent, the bank may have to beef up its loan loss provisioning coverage from 42.87 per cent to 70 per cent by September 2010, according to RBI’s directives. This may also pull down the CAR to a small extent.