Banking 2006

Global Research - India
Global Investment House
State Bank of India

Reuters Code: SBI.BO Listing: Bombay Stock Exchange National Stock Exchange London Stock Exchange Ahmedabad Stock Exchange Kolkata Stock Exchange Chennai Stock Exchange
Current Price: Rs 1,223 (Jan 12, 2007)
January 2007
HOLD
Investment Summary
State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largest commercial bank in India and accounts for approximately 18% of the total Indian banking business and the group account for 25% of the total Indian banking business. The central bank, Reserve Bank of India (RBI) is the largest shareholder in the bank with 59.7% stake followed by overseas investors including GDRs with 19.78% shareholding as on September 06. RBIs stake in the bank is likely to be transferred to the Government of India (GOI). SBI has the largest distribution network in India spread across every nook and corner of India. As on September 06, the bank has 14,061 branches which include 4,755 branches of its associated banks. The bank also has the largest network of 5,624 ATMs. Since the last ve years the bank has showed continued growth in its core business. The total asset size of the bank reported a CAGR of 9.4% during the period FY01-FY06 and stood at Rs.4,938.69bn as of September 2006. In H1FY07, the bank reported net interest income (NII) of Rs.182.14bn, representing a growth of 2.74% over H1FY06 while the bank reported a net prot of Rs.19.8bn, registering a decline of 18.67% during the same period. Credit off take of the bank has been lower than the Indian banking industry during the past few years. The total credit book of the bank grew at a CAGR of 18.2% over the last ve years and stood at Rs2,832.68bn at the end of September 2006. The industry growth during the same period was around 28%. The banks asset quality has improved over the past few years. Gross NPL to gross loans stood at 3.57% as of Sep-end 2006 while net NPLs stood at 1.67%. The bank has provided for 54.06% of its NPLs as on Sep-end 2006, which is below the industry average of around 68%.
January 2007
State Bank of India
Total deposits of the bank grew at a CAGR of 9.4% over the last ve years to reach Rs3,800.5bn, with low cost deposits registering an impressive CAGR of 15.4% during the same period. Contribution of low cost deposit to total deposit during the period too has moved up sharply from 36.3% in FY01 to over 47.6% in FY06. However, current and saving account (CASA) contribution in H1FY07 has declined to 43.65%, thereby signicantly increasing cost of funds and hence margin contraction. On a sequential basis, margins of the bank declined by 8bps to 3.32%. The capital adequacy ratio of the bank stood at 12.63% (Tier-I of 8.74% and Tier-II of 3.89%) at the end of H1FY07. To augment its CAR to provide a stable platform for further growth, the bank plans to raise upto Rs.100bn as subordinate debt during the next few months. The bank also has a cushion to raise further Rs40bn in the form of Hybrid Tier 1 capital. SBI has been a net seller in the bond market and is using its excess investments to fund its loan growth. As on September 2006, investment book size of the bank stood at Rs1,470bn which declined from Rs1,650bn as of March 2006. Of the total book size, Rs1,020bn is in Held To Maturity (HTM). Of the Available for Sale (AFS) book, the duration of the portfolio of less than two years has been maintained, with mark-to market cushion up to 8.12%. SBI is the market leader in the Indian banking space. At the CMP, stock trades at 14.5x and 12.1x of its earnings for FY07E and FY08E respectively and 3.3x and 2.96x of its adjusted book value. We have valued SBI on a sum-of-the-parts methodology to capture the true value of the associate banks and non-banking businesses. SBI has seven associate banks and comprised a signicant portion of the book value. Similarly, other businesses of the bank are growing signicantly faster than the core banking business and will make an increasing part of the market value. We initiate our coverage of SBI with a Hold rating and value the banks share at an intrinsic value of Rs.1,209 based on the sum-of-the-parts valuation methodology. Though the bank is the proxy for Indian economic growth, the current market price already captures the future growth potential. Hence, we recommend a Hold on the stock with a medium term perspective.
State Bank of India
January 2007
Table 1: SBI at a glance Price ( As on Jan 12 2007) Rs.1,223 Year 2008 (E) 2007 (E) 2006 2005 Shares in Issue 526.3mn Net Interest Net prot Income Rs. Mn Rs. mn 181,454 160,784 156,356 139,446 53,007 44,367 44,067 43,045 EPS Rs. 100.7 84.3 83.7 81.8 Market Cap Rs.643.6bn BVPS ROAE Rs. (%) 655.4 586.0 525.3 457.4 16.2 15.2 17.0 19.4 52 week price range Rs.1,379/684 P/E (x) 12.1 14.5 11.6 8.0 P/BV (x) 1.87 2.09 1.84 1.44
Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price on the Bombay Stock Exchange as on Jan 12, 2007. Source: SBI and Globals Estimate
Chart 1: Share Price movement vis--vis BSE Sensex and BSE Bankex
16000 14000 12000 10000 Index 8000 6000 4000 2000 0 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 600 400 200 0 1400 1200 1000 800 SBI share price (Rs)
SENSEX
Bankex
SBI
Source: Bombay Stock Exchange
January 2007
State Bank of India
State Bank of India

Background State Bank of India is the largest and one of the oldest commercial bank in India, in existence for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank namely Reserve Bank of India (RBI) is the major share holder of the bank with 59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public holding (other than promoters) at 40.3%. SBI has the largest branch and ATM network spread across every corner of India. The bank has a branch network of over 14,000 branches (including subsidiaries). Apart from Indian network it also has a network of 73 overseas ofces in 30 countries in all time zones, correspondent relationship with 520 International banks in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as on 31st March, 2006. Of this, 29.51% are ofcers, 45.19% clerical staff and the remaining 25.30% were sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and Ahmedabad Stock Exchange while its GDRs are listed on the London Stock Exchange. SBI group accounts for around 25% of the total business of the banking industry while it accounts for 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued performance in the last few years in scaling up its efciency levels. Net Interest Income of the bank has witnessed a CAGR of 13.3% during the last ve years. During the same period, net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%. Management
SBI has a strong and experienced management
The bank has 14 directors on the Board and is responsible for the management of the banks business. The board in addition to monitoring corporate performance also carries out functions such as approving the business plan, reviewing and approving the annual budgets and borrowing limits and xing exposure limits. Mr. O. P. Bhatt is the Chairman of the bank. The ve-year term of Mr. Bhatt will expire in March 2011. Prior to this appointment, Mr. Bhatt was Managing Director at State Bank of Travancore. Mr. Bhatt has more than 30 years of experience in the Indian banking industry and is seen as futuristic leader in his approach towards technology and customer service. Mr. Bhatt has had the best of foreign exposure in SBI. We believe that the appointment of Mr. Bhatt would be a key to SBIs future growth momentum. Mr. T S Bhattacharya is the Managing Director of the bank and known for his vast experience in the banking industry. Recently, the senior management of the bank has been broadened considerably. The positions of CFO and the head of treasury have been segregated, and new heads for rural banking and for corporate development and new business banking have been appointed. The managements thrust on growth of the bank in terms of network and size would also ensure encouraging prospects in time to come.
State Bank of India
January 2007
Shareholding & Liquidity Reserve Bank of India is the largest shareholder in the bank with 59.7% stake followed by overseas investors including GDRs with 19.78% stake as on September 06. Indian nancial institutions held 12.3% while Indian public held just 8.2% of the stock. RBI is the monetary authority and having majority shareholding reects conict of interest. Now the government is rectifying the above error by transferring RBIs holding to itself. Post this, SBI will have a further headroom to dilute the GOIs stake from 59.7% to 51.0%, which will further improve its CAR and Tier I ratio. Chart 2: Shareholding Pattern of the Bank as on 30th September 2006
8.2% 7.9% 59.7% Reserve Bank of India Mutual Funds / UTI
11.9%
Financial Institutions / Banks
6.3% 6.0%
Overseas investors including FIIs/OCBs/NRIs GDR Issue Others
Source: SBI
As of Sep 2006, SBI has 526.3mn shares outstanding and going by the actual trading volume, the stocks liquidity seems to have decreased in the past two years. In the rst half of FY2007, 93mn shares exchanged hands. The daily share turnover during the year 2006 was 0.22% down from 0.39% witnessed in 2005. But the sentiment in the stock market improved in the rst six months of the current scal with the bank clocking further gains. As of January 12, 2007 banks market capitalisation stood at Rs.643.6bn. Table 2: Liquidity of SBIs stock Volume of shares traded (000) Shares turnover Daily Averages (%) Value traded (Rs. mn) No. of transactions Market Capitalisation (Rs. mn)
Source: Bombay Stock Exchange
Mar-2004 Mar-2005 Mar-2006 H1 2007 502,840 457,731 295,303 92,528 0.39% 0.34% 0.22% 0.14% 264,155 243,817 244,999 79,550 3,832,948 4,223,574 3,168,107 1,570,410 84,530 176,718 243,443 375,765
January 2007
State Bank of India
Key Areas of Operations

The business operations of SBI can be broadly classied into the key income generating areas such as National Banking, International Banking, Corporate Banking, & Treasury operations. The functioning of some of the key divisions is enumerated below: Chart 3: Key Business Areas of the Bank State Bank of India Corporate Banking National Banking International Banking Treasury Operations Associates & Subsidiaries
Source: SBI, Global Research
a) Corporate Banking The corporate banking segment of the bank has total business of around Rs1,193bn. SBI has created various Strategic Business Units (SBU) in order to streamline its operations. These SBUs are as follows: a.1) Corporate Accounts This SBU is important for the bank as its loan portfolio constituted about 27.05% of the banks commercial and institutional non-food credit and 12.85% of the total domestic credit portfolio as on 31st March 2006. Some of the products under corporate accounts SBU are as follows: SBI-FAST, which is the cash management product offered by this SBU, had a turnover of Rs.4,705.75bn as of 31st March 2006. This product is now a comprehensive cash management solution, offering payments in addition to collections. Vendor nancing activity is being integrated with core banking through the internet platform. This is identied as a focus area to capture the credit portfolio of vendors. The foreign exchange business grew by around 55% y-o-y and reached Rs.1,747.70bn as of 31st March 2006. This SBU now handles nearly 12% of the countrys visible trade and about 43% of banks forex business.
a.2) Leasing This SBU is not writing any leases since the past few years as unfavorable business climate and availability of alternative funding options at cheaper cost. As at the end March 2006, the disbursements and capitalization were zero and prot amounted to Rs.245.9mn. a.3) Project Finance This SBU focuses on funding core projects like power, telecom, roads, ports, airports, special economic zones and others. During FY06, total sanctions for 18 projects involving a total
State Bank of India
January 2007
amount of Rs.42.11bn were in place as against 13 projects involving Rs.25.08bn in the previous year. It also handles non-infrastructure projects with certain ceilings on minimum project costs. During FY06 sanctions for 29 projects involving a total amount of Rs.55.80bn were in place as against 27 projects involving Rs.51.63bn in the previous year. As a whole, this SBU achieved total sanctions of Rs.238.86bn (fund based and non fund based) including syndication amount of Rs.140.95bn during the period ended March 2006. During FY06, this SBU entered into nancing of aviation sector actively by sanctioning loans for modernization of airports and acquisition of aircrafts. a.4) Mid Corporate Group The Mid Corporate Group (MCG) created in June 2004 has 7 MCG Regional Ofces controlling 28 large branches with high concentration of Mid Corporate (MC) business. The entire Off-Site MC business of all branches at 31 identied centres has been brought under the fold of MCG. The average processing time of credit proposals is about 15 days and quicker decision making on credit proposals of the Mid Corporate units has resulted in greater customer satisfaction. As of March 2006, 21 MCG branches have been migrated to core banking platform. New technology products like RTGS, CINB, Multi-City cheque facility and Core Power have been introduced in all these branches. These technology products coupled with quick Turn Around Time (TAT) have enabled Mid-Corporate Group to increase its business substantially and generate higher income, both interest and fee based. a.5) Stressed Assets Management During FY06, the banking industry witnessed a major policy initiative by Reserve Bank of India with the opening up of sale / purchase of non performing assets to banks, FIs and non-banking nance companies (NBFCs). During FY06, the bank sold NPAs to the tune of Rs.8.9bn against security receipts and Rs.11.41bn on cash basis to Asset Reconstruction Company (ARCIL). The progress in enforcing the security interest has somewhat slowed down due to the requirement of withdrawing suits pending before the tribunal prior to action being initiated against the defaulting borrowers under the SARFAESI Act. b) National Banking The national banking group has 14 administrative circles encompassing a vast network of 9,177 branches, 4 sub-ofces, 12 exchange bureaus, 104 satellite ofces and 679 extension counters, to reach out to customers, even in the remotest corners of the country. Out of the total branches, 809 are specialized branches. This group consists of four business group which are enumerated below: b.1) Personal Banking SBU This SBU is mainly responsible for retail business. During FY06, personal banking advances increased from Rs.464.51bn to Rs.610.67bn, showing a growth of Rs.146.16bn at the rate of 31.47 % against a growth rate of 40.12% in the previous year. On the home loan front, several new products were introduced, tailored to t the needs of specic customer segments, such as SBIMaxgain (minimize interest burden, earn on savings,
January 2007
State Bank of India
at no extra cost), SBI NRI-Home Loans, SBI Freedom Home Loans (Loans given without mortgage of property, but against alternate securities, instead), SBI Tribal Plus Home Loans. The auto loans portfolio has shown a growth of Rs.17.74bn in absolute terms and 65% which is considerably higher than last years growth, mainly due to implementation of well planned strategies. b.2) Small & Medium Enterprises The SME Business Unit implemented comprehensive strategies, revamped business processes and with its focus on market dynamics and customer preferences, achieved commendable business growth. The initiative was implemented by focusing on specic industry segments, and concentrating on various players in the value chain. Debt restructuring mechanism for units in SME sector has been devised to ensure restructuring of debt of all eligible Small and Medium Enterprises (SMEs) on favourable terms. Focused on the SME sector, projects under Uptech are taken up in location specic and activity specic industry clusters. So far the bank has taken 28 projects for modernisation under the Project Uptech covering industries like foundry, pumps, glass, auto components, and knitwear, etc. The bank has also covered agro based industries like rice mills, sago and starch and horticulture activities like Apple Orchards and grape farming under the scheme. The deposits of the SME SBU increased to Rs.1,042.70bn as at the end of March 2006 from Rs.890.60bn of previous year recording a growth of 17.08% during the year. SME advances increased to Rs.456.53bn from Rs.328.30bn of previous year, recording a growth of 39.06 %. The criteria laid down by the Government of India for growth in SME advances is 20%. b.3) Agricultural Banking This SBU is accountable for agricultural credit both traditional and new thrust areas like contract farming, farmers nanced through Agri Export Zones (AEZs) and value chain nancing. Increase in disbursements during FY06 was 83% against the Govt. of India target of 30%. Agricultural advances grew from a level of Rs.205.26bn in FY05 to Rs.305.16bn as at the end of March 06. As on November 2006, agriculture loans contribute 11% of the total loan book. b.4) Government Banking With the establishment of the government business unit and the consequent focus on marketing, business turnover of this segment has grown substantially over the years. Banks business turnover from the government business segment during 2004-05 was Rs.8,843.81bn. The turnover increased by 10.52 % to Rs.9,773.90bn during FY06. c) International Banking SBI has a network of 73 overseas ofces in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its international branches also. During FY06, 25 foreign ofces were successfully switched over to Finacle software. SBI has installed ATMs at Male, Muscat and Colombo Ofces. In recent years, SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company SBI Botswana Ltd. at Gaborone.
State Bank of India
January 2007
d) Treasury The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent years, the treasury operation of the bank has become more active amidst rising interest rate scenario, robust credit growth and liquidity constraints. The bank diversied its operations more actively into alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in order to offset the losses in xed income portfolio. Reorganisation of the treasury processes at domestic and global levels is also being undertaken to leverage on the operational synergy between business units and network. The reorganization seeks to enhance the efciencies in use of manpower resources and increase maneuverability of banks operations in the markets both domestic as well as international. e) Associates & Subsidiaries The State Bank Group with a network of 14,061 branches including 4,755 branches of its seven Associate Banks dominates the banking industry in India. In addition to banking, the Group, through its various subsidiaries, provides a whole range of nancial services which includes Life Insurance, Merchant Banking, Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in the Money Market. e.1) Associates Banks: SBI has seven associate banks namely State Bank of Indore State Bank of Travancore State Bank of Bikaner and Jaipur State Bank of Mysore State Bank of Patiala State Bank of Hyderabad State Bank of Saurashtra All associate banks have migrated to Core Banking (CBS) platform. Single window delivery system has been introduced in all associate banks. SBIs seven associate banks are the rst amongst the public sector banks in India to get fully networked through CBS, providing anytime-anywhere banking to its customers to facilitate a bouquet of innovative customer offerings. e.2) Non-Banking Subsidiaries/Joint Ventures i) SBI Life: SBI Life is the third largest private insure with the market share of 10.21% among the private players and number one in terms of number of lives insured amongst private players (no. of lives insured and policies is 25mn). In H1FY07 gross premium was Rs.7.68bn. ii) SBI Capital Markets Limited (SBICAP) SBI Caps forged ahead in issue management, project advisory and structured nance, sales
January 2007
State Bank of India
and distribution. To capitalize on the emerging opportunities, SBI Caps has promoted four wholly owned subsidiaries viz. SBICAP Securities Ltd. for undertaking stock broking activities, SBICAPS Ventures Limited, SBICAP Trustee Company Limited for undertaking venture capital business and SBI CAP (UK) LTD., for carrying on the Financial Services Authority (FSA) regulated activities. On the international front, the expertise of SBI Caps in the infrastructure and project advisory has received international acclaim. In addition, the company has been placed 11th globally in the Mandated Project Advisor league tables by Thompsons, and one of the projects handled by the company has been selected as the Asia Pacic Infrastructure deal of the year for FY06. SBI Caps booked gross income amounting to Rs.1.79bn in FY06 as against Rs.1.75bn in the previous year, while PAT of the company was at Rs.906.2mn in FY06 as against Rs.881.2mn in the last year. iii) SBI DFHI LTD SBI group holds 67.01% of the companys paid up capital, while other nationalized banks hold 22.46%. All India nancial institutions and private sector banks hold 5.84% and the Asian Development Bank holds 4.69% as on March 31, 2006. For the year ended 31st March, 2006, the company has earned a PAT of Rs.24.4mn. Total secondary market turnover of the company was Rs.285.39bn which amounted to a market share of 12.89% among all primary dealers. iv) SBI Cards & Payments Services Pvt. Ltd. (SBICSPL) SBICSPL is ranked 2nd in industry with cards in force over 3mn as on September 06. During FY06, the aggregate revenue generated by the SBICSPL was Rs.5.27bn while pre-tax prot was Rs.558.6mn. v) SBI Funds Management (P) Ltd. (SBIFMPL) SBI Mutual Fund is the mutual funds arm of the bank. SBIFMPL reported a total inow of Rs.481.67bn in the various schemes during the year. The total assets under management are Rs.132.49bn. The company reported a net prot of Rs.186.4mn as at the end of March, 2006. f) Human Resources The bank had total staff strength of 198,774 on the 31st March, 2006. Of this, 29.51% are ofcers, 45.19% clerical staff and the remaining 25.30% were sub-staff. SBI had launched VRS scheme for its employees in FY01 in which it has reduced it staff by approximately 5,000 and estimates natural retirement of another 5,000 employees in next 4-5 year.
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State Bank of India
January 2007
Strategy and New Developments

Though a public sector bank, it has set in motion a series of steps to transform itself into a modern, technology enabled customer-centric, world-class banking organization, meeting best global practices and standards in banking and service delivery. The bank has maintained its record of protability, while adjusting to the changing circumstances and interest rate environment. Despite intense competition and pressure on spreads it has maintained and improved its NIM. Major innovations and initiatives are in the arena of technology, banking products and processes, service delivery channels and human resource to efciently serve bank customers across the globe. The bank maintains its drive on the technology front to enhance customer service, increase productivity, and manage risk better. After having computerized all its branches, it has been moving swiftly to implement real time on-line banking. As a part of its strategy to stay ahead of the competition, SBI had increased its benchmark lending rates by 50 basis points to 11.5 percent; this lending rate increase is due to the rising cost of funds for banks, which are paying more for deposits as a way of encouraging investors to save. Growing international presence. The bank continues to expand its global footprints with the number of foreign ofces having increased to 70 in 2005-06 from 54 in 2004-05. During the year FY06, SBI opened representative ofces in Angola and Turkey and additional branches were opened in Bangladesh, Sri Lanka, U.K, and Canada. In tandem with the countrys growing trade and business with China, its representative ofce in Shanghai was upgraded to a full branch. The bank is also proceeding apace on international acquisitions. Following on from its successful acquisition of Indian Ocean International Bank in Mauritius, the bank is acquiring a majority stake in Giro Commercial Bank in Kenya and PT Bank IndoMonex in Indonesia. Together, foreign ofces and subsidiaries brought in a net prot of US$80 million, contributing a steadily growing share to the overall prots of the bank. The foreign branches are on core banking. New thrust areas Going forward, the bank identies new thrust areas to sustain its growth momentum, and these include: Finally, waking up to intense competition in the domestic and international nancial sectors, SBI has begun rming up 15 new business initiatives with substantial prot potential. The bank has formed a new department to draw up a blueprint for these cutting-edge segments in nancial sector services Private equity, point of sale, cards business (gift cards, payroll cards & other cards,) pension, general insurance, merchant acquisitions and gold banking are a few areas SBI is looking at for developing its prole as a modern 21st century bank. With the new initiative, SBI is determined to capture its lost market share. On the private equity business, the bank not earmarked any amount, but it could be in a range of Rs1bn-1.5bn.
January 2007
State Bank of India
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State Bank of India has applied for permission for banking operations in China, which, if approved, would enable Chinese corporations to open their accounts with India's largest banking network. The SBI Shanghai branch will also increase investment in China, enhancing trade development between New Delhi and Beijing. SBI was expected to offer remittance services in China and might open new branches in South China and Beijing by 2008. SBI's Shanghai branch provides investment consultancy and acquisition nancing, and remittances directly to India, as well as foreign currency services for overseas companies. As per the new SBI Act the bank can raise funds from the market and lower the central bank's holding to 51 percent. The new bill proposes to amend the SBI Act to allow the minimum central bank holding in the bank to be lowered to 51 percent from 55 percent. The bill seeks to allow SBI to raise funds through preference shares or private placements. It will also be allowed to issue bonus shares, which it could not do under the existing act. The voting rights of preference shareholders will be capped at 10 percent. The bank could raise fresh equity in the scal year beginning in April 2007, after changes are made in the law to dilute the central bank's stake. The bill also seeks to increase SBI's authorised capital to Rs.50bn. The bank's paid-up capital was Rs.5.26bn as of Sep 06. Indian banks have been raising capital to comply with Basel II prudential norms and meet strong demand for loans in a fast growing economy. SBI group has around 8,500 branches under CBS platform with 3,710 branches of SBI. As a group SBI has 64% of it business and around 89mn accounts under CBS.
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State Bank of India
January 2007
Indian Banking Sector

Indian banking sector can be divided mainly into four broad categories namely public sector banks, old private sector banks, new private sector banks, and foreign banks. The other categories of banks include co-operative banks and regional rural banks. Since these banks dont form a substantial chunk of the banking system, we will focus on the rst four categories. There were as many as 222 scheduled commercial banks in India as at the end of Mar 2006. Table 3: No. of banks in India Number of Commercial Banks (a+b) a. Scheduled Commercial Banks - of which: Regional Rural Banks b. Non-Scheduled Commercial Banks
Source: Reserve Bank of India
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 297 292 290 289 222 293 288 286 285 218 196 196 196 196 133 4 4 4 4 4
Indian banking driven by structural factors The Indian banking sector in recent years is driven mainly by structural factors such as corporate capex cycle, retail loan boom, and infrastructure funding with low incremental defaults. Robust macroeconomic performance continued to strengthen the nancial performance of scheduled commercial banks (SCBs) in recent years and this trend continued in 2005-06 as well. The banking sector has been driven by vigorous credit growth during recent years. The heartening factor was that the credit offtake was more broad-based with all the sectors of the economy going for credit. Housing and retail segments were joined by the demand for credit from agriculture and industry segment as well. The credit demand was not entirely nanced by the customer deposits as the growth of deposits slowed down marginally in 2005-06. In order to meet the increased demand for credit, banks increased their dependence to non-deposit resources. In addition to this, number of banks curtailed their fresh investment in Government securities to nance the credit demand. The strong credit offtake was primarily responsible for the improved net interest income of many banks. In fact, the strong credit demand was able to more than offset the impact of sharp decline in non-interest income. Protability of public sector and new private sector banks improved, despite hardening of sovereign yields. Asset quality of SCBs has been improving since the past three years as reected in the decline in gross non-performing assets in absolute terms. This is despite the fact that, RBI has asked banks to switch over to the 90-day delinquency norm with effect from March 2004. With the sharp increase in risk-weighted assets, many banks shored up their capital by way of new issues. Public sector banks dominate the Indian banking system though their market share is dwindling The public sector banks (PSBs) account for a major share of all the banking indicators like assets, deposits, advances etc. However, the private sector banks, especially new private banks like ICICI Bank, HDFC Bank and UTI Bank etc. are giving tough competition to their
Robust macroeconomic performance strengthen the nancial performance of commercial banks in recent years
January 2007
State Bank of India
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government owned peers. Public sector banks which comprise State Bank of India group and other nationalised banks are continuously losing their market share in bank deposits since the opening up of the banking sector to their private counterparts. According to latest Reserve Bank of India (RBI) gures, private banks and foreign banks have gained during the year. The data indicates that SBI groups market share in deposits dipped to 23.4% in FY06 from 24.2% in the previous year. The share of nationalised banks, as a group, accounted for 48.4%, down from 49.8% in the previous year. The share of foreign banks, regional rural banks and private banks aggregate deposits were 5.3% and 19.4%, respectively, as against 4.45% and 18.1%, respectively, in the previous year. As regards loans extended by commercial banks, there has been no signicant change in the market share of various bank groups. The share of nationalised banks was 47.5% in FY06 as against 47.4% in the previous year. The share of the SBI group was stable at 23.1%. The share of private banks was 20.2% (20.1%). However, foreign banks recorded a marginal dip in their share in bank credit to 6.5% as against 6.7% in the previous year. Robust growth in assets The asset size of 43 private sector banks, for which the data is available, rose by a healthy 37.7% during 2005-06 as compared to 23.2% in 2004-05. Loans and advances constituted 53.5% of the total assets in 2005-06 as compared to 51.3% during the previous year. On the back of robust economic growth and industrial recovery, loans and advances witnessed strong growth while investments surged by 30.8% in FY06. On the liabilities side, total deposits constitute around 69.7% of the total liabilities of the private sector banks in 200506. Deposits grew by 41.6% in 2005-06. In keeping with the Basel II requirements, capital and reserves and surplus showed vigorous growth. The increased capital also underscores the growing importance of non-deposit resources of SCBs. Table 4: Consolidated Balance Sheet of 43 Private Sector Banks (Rs. bn) Year FY03 FY04 FY05 Sources of Funds Capital 46.45 47.63 74.95 Reserves Total 219.39 261.70 369.16 Deposits 2,128.37 2,719.87 3,352.40 Borrowings 566.30 531.65 655.93 Other Liabilities & Provisions 376.61 475.32 519.46 Total Liabilities 3,337.11 4,036.16 4,971.90 Application of funds Cash & Balances with RBI 164.85 234.34 245.18 Balances with Banks & money at Call 124.77 154.81 201.07 Investments 1,201.90 1,426.68 1,580.23 Advances 1,534.66 1,863.76 2,552.38 Fixed Assets 79.29 80.08 81.96 Other Assets 231.65 276.49 311.08 Total Assets 3,337.11 4,036.16 4,971.90
Source: Capitaline.com
FY06 92.89 525.04 4,746.44 794.83 688.44 6,847.65 277.59 323.79 2,066.44 3,667.89 91.22 420.72 6,847.65
Business growth of all scheduled commercial banks During the last nancial year ( up to March 31, 2006) incremental gross bank credit increased by 36% as compared to a growth of 31.9% (net of conversion) in the same period of the
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January 2007
previous year. The year on year growth of gross bank credit as on 31st March 2006 was 29.9% as against 26.9% (net of conversion) on the corresponding date of last year. Non food credit up to FY06 registered a growth of 37.3% as compared to 32.8% during the same period last year. The year on year growth rate of non food credit was 30.8% as compared with 27.7% on the corresponding date of last year. Table 5: Business growth of Indian banking sector Outstanding as on (Rs.bn) Items 18-Mar-05 31-Mar-06 1. Bank Credit Food Credit Non Food Credit 2. Aggregate deposit Demand Deposit Time Deposit 3. Investments in Govt. and other approved securities Government Securities Other approved securities Retail loan boom Retail credit to GDP continues to remain low compared to other regional emerging markets. The target population is small, however growing at a fast pace. We expect the retail credit market to grow from Rs.750bn in Mar 03 to Rs 3464bn by Mar 08. Table 6: Share of retail loan as percentage of GDP (%) Name of the Country Singapore Malaysia Taiwan Hong Kong India
Source: Federation of Indian Chambers of Commerce and Industry
% Variations
11,004.3 411.2 10,593.1 17,002.0 2,480.3 14,521.7 7,391.5 7,189.8 201.7
14,964.7 417.9 14,546.9 20,876.7 3,472.5 17,404.2 7,275.8 7,046.9 228.8
36.0% 1.6% 37.3% 22.8% 40.0% 19.8% -1.6% -2.0% 13.4%
Source: Monthly economy report Mar06 (Ministry of Finance)
Retail loan/GDP 48.0 52.0 52.0 60.0 8.0
Indias population is young with over 50% of the population under the age of 25 and 80% under the age 45. Growing urbanization, rising disposable income of the middle-income group comprising 23% of the population is leading to a shift in consumption patterns and fuelling retail loan boom. With savings rate at 28% (of which 90% is from households), and low leverage of individual balance sheets, we expect retail loan boom to continue with low incremental defaults.
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Chart 4: Average Income in US$

250 200 150 100 50 0 1996
V e r y R ic h ( $ 1 9 5 0 0 )
A s p ir a n t ( $ 9 8 0 )
1 6 .5 33 44 5 4 .1 3 2 .5 1 .2 2002
C o n s u m in g C la s s ( $ 4 5 0 0 )
D e s titu te s ( $ 4 4 0 )
2 4 .1 3 3 .1
2 0 .2 8 1 .7
7 4 .4 4 6 .4 2 .6 2007
C lim b e r s ( $ 2 3 0 0 )
7 5 .5 5 .2
Source: NCAER
Surge in bank deposits Aggregate deposits of SCBs increased by Rs.1,852.44bn (8.8%) in the current scal year up to October 13, 2006 as compared with an increase of Rs.1,153.09bn (6.5%) in the corresponding period of the previous year. On an annual basis, the growth in aggregate deposits at Rs.3,938.49bn (20.7%) was higher than that of Rs.2,982.29bn (18.6%) a year ago. Aggregate deposit growth during 2006-07 has to be viewed in the context of several favourable developments during the period, namely, improvement in corporates internally generated resources placed with the banking system, the relative attractiveness of bank deposits vis--vis small savings owing to higher interest rates on banking deposits and extension of tax incentives for longer term deposits (ve years and above) as well as active deposit mobilization strategies mounted by banks to fund the expansion in credit. On the other hand, demand deposits, which have exhibited close correlation with stock market activity in the recent period, have moderated since the equity market turbulence in mid-May and June. Overall, it is useful to note that the incremental non-food credit-deposit ratio during the current year so far, has declined to 77.7% from 105.8% a year ago. Banks faced a resource crunch in FY06 and FY05, with loans growing more than deposits in absolute terms. This has forced many banks to go on overdrive to woo depositors by offering attractive rates on term deposits. Banks have raised deposit rates by over 50 basis points over the last six months. In recent weeks, many private banks have started offering higher returns on nine-month to one-year term deposits. PSBs have raised rates on term deposits offering returns comparable to small savings schemes. Besides from August 1, 06 bank deposits for over ve years are eligible for tax benets. However, with the government asking PSBs to roll back lending rate hikes, banks may not be able to offer better returns on deposits. However, private and foreign banks could still come out with more attractive rates as they are not governed by this. Hence, for private banks and foreign banks deposit mobilization is not much a constraint.
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January 2007
Private sector banks having higher operating cost Foreign banks in India have one of the highest operating expenses to total assets ratio in India at 2.7% during the rst quarter of FY07. Foreign banks were followed by new private sector banks with the operating expenses to total assets ratio of 2.6%. The reason behind the higher operating expenses for the foreign banks and new private sector banks is their heavy investment in technology as compared to the government owned banks. The operating cost for public sector banks took a breather in FY06, on the back of the base effect of higher staff costs in FY05 (staff cost account for over 65-70% of the total operating expenses). Table 7: Scheduled Commercial Banks Operating Exp/Total Assets ( Per cent) 2005-06 Item/ Bank Group Q1 Q2 Q3 Operating Expenses/ Total Assets* Scheduled Commercial Banks 2.2 2.3 2.4 Public Sector Banks 2.1 2.3 2.4 Old Private Sector Banks 2.3 2.2 2.3 New Private Sector Banks 2.4 2.4 2.1 Foreign Banks 2.8 2.7 3.5 * Operating expenses annualised to ensure comparability between quarters.
Source: RBI
Q4 1.7 1.7 1.5 1.6 2.0
2006-07 Q1 2.3 2.2 2.1 2.6 2.7
Operating costs are not likely to take a breather for private sector banks as the banks are aggressively increasing their delivery channels and investing heavily in technology. The new formats include specialised ofces where banks extend low-ticket credit and raise low cost deposits. High volume growth is likely on the back of higher operating costs. However, we do not expect any rise in operating cost to income ratio, despite the rapid increase in infrastructure as we believe that the income is also expected to go up sharply going forward. NIM improved for efficient players Scheduled commercial banks in India have a net interest margin of around 3% during the rst quarter of FY07. Foreign banks in India have one of the highest net interest margins to total assets ratio of 4% followed by public sector banks and old private sector banks. We believe that net interest margins had come under pressure due to competition, a better regulatory environment and lower risk charge for default on loans. We believe that net interest income growth will be robust due to growth in volumes of credit-offtake. Table 8: Scheduled Commercial Banks - Net Interest Income/Total Assets (Per cent) Item/ Bank Group Net Interest Income/Total Assets* Scheduled Commercial Banks Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks
Source: RBI
Q1 3.1 3.2 3.0 2.3 3.8
Q2 2.8 2.8 2.8 2.5 3.7
Q3 3.1 3.2 3.0 2.3 3.6
2005-06 Q4 2.3 2.4 2.1 1.6 2.8
2006-07 Q1 3.0 3.0 3.0 2.6 4.2
*NII annualised to ensure comparability between quarters.
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Net profit remains flat Total income of SCBs declined from 8.21% of their assets in 2004-05 to 8.03% in 2005-06, as both interest and non-interest income moderated during the year. Total expenditure (as % to total assets), on the other hand, was unchanged from the previous year. As a result, earnings before provisions and taxes, as % to total assets, during 2005-06 were lower than the previous year. However, in view of lower provisions, prots after tax, as % to total assets, at 0.88% during 2005-06 were almost the same as during 2004-05 (0.89%). As many as 45 banks (out of the total of 85 banks) recorded an increase in the prots ratio during the year. Table 9: Scheduled Commercial Banks - Net Prot/Total Assets (Per cent) Item/ Bank Group Net Prot/Total Assets* Scheduled Commercial Banks Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks
Source: RBI
Q1 0.9 0.8 0.7 1.1 1.7
Q2 1.0 0.9 0.6 1.1 1.9
2005-06 Q3 Q4 1.0 1.0 0.8 1.0 1.0 0.7 0.6 0.3 0.6 1.5
2006-07 Q1 0.9 0.7 0.8 0.8 2.4
*Net prot annualised to ensure comparability between quarters.
Improving asset quality.. The SARFAESI Act, brought into force in mid-2002, empowered the banks to sidestep the courts and dispose of the defaulters properties given as securities to recover the dues after giving due notice. Though the act sent the defaulters scurrying in panic, its progress has been plagued by one hurdle or the other. According to a CRISIL study, about 36% of the outstanding NPAs are outside the jurisdiction of the act on account of the exemptions provided by it. Agricultural loans and loans below Rs1.1mn are outside its purview. The study further says that banks can apply the act only to one-third of the gross outstanding NPAs. Public sector banks have sent notices to 28,866 entities for recovering Rs101.7bn under the act. While these recoveries may seem insignicant in comparison to the overall level of NPAs in the banking system, the substantial amounts recovered in such a short time from long pending sticky loans is indeed commendable. There is now a growing consensus among the bankers and borrowers alike that more stringent debt recovery measures will follow in the future. This augurs well for the NPA problem of the banks; more importantly, it will have a healthy deterrent action on fresh slippage also. Asset quality of scheduled commercial banks improved further during the year, with gross and net NPA ratios reaching historical low levels of 3.5% and 1.3%, respectively, at endMarch 2006. Robust economic activity and better recovery climate have facilitated reduction in non-performing assets in recent years. Only ve banks had net NPAs in excess of ve per cent of their net advances. Financial institutions, scheduled urban co-operative banks and Non Banking Finance Companies also recorded an improvement in their asset quality during 2005-06, with net NPA ratios reaching 1.3%, 3% and 1%, respectively, of their net advances at the end of March 2006.
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Table 10: Scheduled Commercial Banks - Gross NPAs to Gross Advances (Per cent) Item/ Bank Group Gross NPAs to Gross Advances Scheduled Commercial Banks Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks Net NPAs to Net Advances Scheduled Commercial Banks Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks
Source: RBI
Q1 5.1 5.5 6.2 3.1 3.0 1.9 2.0 2.7 1.6 0.9
2005-06 Q2 Q3 4.7 5.2 5.8 2.6 2.5 1.7 1.8 2.5 1.1 0.7 4.1 4.5 5.4 2.1 2.4 1.4 1.5 2.2 1.0 0.7
Q4 3.5 3.9 4.5 1.8 2.1 1.3 1.4 1.7 0.8 0.8
2006-07 Q1 3.4 3.8 4.6 1.9 1.9 1.3 1.4 1.6 0.9 0.7
Credit Information Bureau ... With the launch of Credit Information Bureau (India) Limited (CIBIL) in 2000 asset quality of banks is likely to improve further. CIBILs aim is to fulll the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members. The database compiled by CIBIL would contain the credit history of borrowers including details such as the name of the company or partnership, full address, registration number, names of directors or partners, credit facilities availed, amount outstanding against each facility, among other information. CIBIL had launched its consumer bureau, catering to individual borrowers and has amassed 55 million records so far. Around 90% of the lenders in the nancial system are now using the database of Cibil. Recently, CIBIL has launched its commercial bureau for catering to non-individuals viz. corporate, small and medium enterprises (SMEs) and other types of business entities earlier this month. Sufficient capital to sustain growth At end-March 2006, scheduled commercial banks were well placed in respect of capital requirements, notwithstanding a modest decline in the aggregated capital ratios during the year. The decline in CRAR during 2005-06 could be attributed to the higher rate of increase in total risk weighted assets vis--vis the expansion in capital during the year. Higher growth in risk weighted assets, in turn, reected higher growth in the advances portfolio of banks as compared to investments in government securities, increase in risk weights for personal loans, real estate and capital market exposure and application of capital charge for market risk for investments held under the available for sale category from March 2006. Although the overall CRAR declined, the core capital ( i.e., Tier I) ratio of the banks increased from 8.4% cent at end-March 2005 to 9.3% at end-March 2006 reecting increased access by banks to primary capital market as also transfer of investment uctuation reserve from Tier II to Tier I capital. The increase in Tier I ratio would provide more headroom to banks in raising capital funds through Tier II, especially in the context of implementation of Basel
January 2007
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II norms from March 2007. Only three scheduled commercial banks, of which one is under moratorium, could not meet the prescribed CRAR requirements at end March 2006. Table 11: Scheduled Commercial Banks - CRAR (Per cent) Item/ Bank Group Scheduled Commercial Banks Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks
Source: RBI
Q1 12.7 12.8 13.1 12.1 13.4
2005-06 Q2 Q3 12.4 12.8 12.6 12.7 12.2 12.1 11.4 13.0 13.2 13.3
Q4 12.4 12.2 11.8 12.6 13.0
2006-07 Q1 12.0 12.0 11.6 12.2 12.3
Agriculture lending faltering despite growth potential Agriculture lending has emerged as one of the fastest growing loan segments for commercial banks. But despite a huge growth potential, most banks are still below the level of 18% of total loans stipulated by the government. As per the priority sector norms in India, banks have to lend 40% of net bank credit to priority sector which includes among other, agriculture loan, small scale industry loans and home loans upto Rs1mn. Of this banks have to lend 18% to agriculture. Market major SBI has managed to reach just 14.3% of the stipulated 18% during FY06. Among other major commercial banks, ICICI Bank has managed to achieve a target of 16.8%, while Union Bank of India and Bank of Baroda recorded 16% and 14.6%, respectively. Bank of India is the only entity among large lenders to cross the 18% target at 19.3%. The government wants the banks to double their agri-loan portfolio over the next three years. Basel-II norms some breather for banks In its mid-term review of Annual Policy for FY07, RBI pushed back the deadline for implementation of Basel II norms. While foreign banks in India and Indian banks operating abroad are to meet Basel-II norms by March 31, 2008, all other scheduled commercial banks will have to adhere to these guidelines pertaining to risk provisioning by March 31, 2009. This will provide banks some more time to put in place appropriate systems so as to ensure full compliance of Basel II. Credit cycle likely to sustain Low real rates and a sharp rise in bank credit have been at the heart of Indias growth story over the past three years. Nominal bank credit growth has accelerated from the bottom of 10.7% in September 2003 to 30.5% currently. The current credit cycle is the longest credit cycle India has witnessed since the early 1970s. Commercial credit to GDP has increased to 47% as at end-June 2006 from 35% in January 2003. Though it is still lower as compared to East Asia and Pacic nations with the credit to GDP ratio of around 105%. Credit outstanding has increased by almost US$190bn to US$380bn over the past three years.
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Table 12: Growth Markets- Key Sovereign Indicators (%) Country Broad Money/GDP Turkey 49.8 Russia 35.2 Brazil 27.9 China 163.5 India 69.4 US 64.1
Source: Fitch Sovereign data comparator
Private Credit/GDP 25.4 27.1 32.7 123.5 47.0 82.7
The most important point here is the rising interest rates. Even though there is sharp rise in real interest rates, credit growth would not be impacted due to higher demand from every sector like corporate, retail and agriculture. With the banks increasing its deposits rates there will be a relatively higher time deposit growth in the banking system, which will ensure easy ow of credit to the corporate sector. RBI has been concerned about the strong credit growth in the retail and real estate sectors. Over the past three years, only 44% of the incremental credit disbursed owed to the industrial and agriculture sectors. In a bid to slow this aggressive credit growth in sectors other than industry and agriculture, RBI has initiated number of restraining measures which include increasing risk weightage for commercial real estate-related loans to 150% from 100%, for housing to 75% from 50% and for consumer loans (unsecured credit and credit cards) to 125% from 100%. RBI has also increased the mandatory standard loan provisioning in specic sectors (personal loans, capital market-related loans, residential loans greater than Rs2mn and commercial real estate loans) to 1% from 0.4%. On a year-on-year basis, non-food credit of SCBs exhibited a growth of Rs.3,761.05bn (30.5%) as on October 13, 2006 on top of an increase of Rs.2,979.03bn (31.8%) a year ago. Provisional information available from select SCBs for June 2006 indicates that within the services sector which currently absorbs about 49% of non-food bank credit, retail lending rose by 47% on a year-on-year basis with growth in housing loans being 54.3%. As a result, the share of retail credit in total bank credit increased marginally from 26.8% in June 2005 to 27.3% in June 2006. Loans to commercial real estate almost doubled during the period, increasing their share in total bank credit from 1.4% to 2.0%. The year-on-year growth in credit to industry was of the order of 26.6% by June 2006; however, its share in total bank credit fell from 43.2% in June 2005 to 37.8% in June 2006. Substantial increases were observed in credit ow to industries like infrastructure (28.3%), metals (38.0%), textiles (32.2%), engineering (23.0%), vehicles (33.0%), gems and jewellery (46.3%), food processing (25.8%) and construction (59.7%). Shares of bank credit to infrastructure, metals and textile industries in total credit to industry increased from 19.8%, 11.1% and 10.8%, respectively, in June 2005 to 20.1%, 12.1% and 11.3%, respectively, in June 2006. The year-on-year growth in bank credit to agriculture was of the order of 37% by June 2006. The share of agriculture in total bank credit rose marginally from 13.1% in March 2006 to 13.4% in June 2006. Credit to GDP ratio much lower The credit to GDP ratio was slightly above 40% by end-March 2006. However, despite the steady increase over the years, the credit to GDP ratio in India is much lower than several
Credit to GDP ratio in India was slightly above 40 % by end-March 2006
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advanced and emerging market economies. For example, it is around 150% in China and in Thailand its just above 90%. This suggests that nancial deepening is still low in India as compared to the other emerging countries and is expected to improve further with the development of the nancial sector. Thus, India offers tremendous potential in the long-term as its credit to GDP ratio is likely to improve further. Foreign banks eager to enter Indian market India offers tremendous opportunities for banks in India. This is the reason why a number of foreign banks are eager to set up shop in India. However, the government is moving cautiously in opening up the market to foreign banks. The government has set up a roadmap for the foreign banks to tread on. The roadmap has two phases. During the rst phase between March 05 and March 09, foreign banks may establish a presence by setting up a wholly-owned subsidiary or conversion of existing branches into a wholly-owned subsidiary. The second phase is to commence in April 09 after consultation with all stakeholders in the banking sector. The review is expected to examine issues such as dilution of stake and permitting mergers/acquisitions of private sector banks in India by a foreign bank. A large number of foreign banks are queuing up to enter India despite a regulatory iron curtain that is restricting entry. This is regardless of the fact that most foreign banks seems to be unhappy with the Reserve Bank of Indias roadmap for liberalisation of entry norms for foreign banks proposed in February 05. Foreign banks wants the government to relax regulations such as priority sector lending, ownership rules and statutory liquidity requirements, branch licensing, single borrower limits etc. Foreign banks have targeted India for a variety of reasons. They are impressed by the pace of reforms, huge market, interest of foreign institutional investors and the countrys changing image. This is evident from the levels of investment and expansion plans for the country. Union Bank of Switzerland (UBS) and Australia-based Macquarie Bank are some of the banks which are interested in India. Banks investment valuation set to change Banks method of evaluating their investments in their listed subsidiaries or in joint venture companies may now undergo a drastic change. Banks typically classify these investments under the held-to-maturity (HTM) category. The Reserve Bank of India (RBI) released a set of revised draft guidelines which suggest that banks should evaluate these investments based on the extent of impairment in these companies. The extent of impairment could be detected either through the market prices or through the current rating of the security. In case of unrated securities, RBI suggests that banks may consider the market price in conjunction with the age of the security. The proposed regulation requires banks to set aside funds for a fall in the market value of their equity investments even if there is no intent to sell them. Besides, investments in perpetual preference shares, units of open-ended mutual fund schemes and securities with a put option cannot be classied as HTM reserves. As per revised draft guidelines on classication and valuation of investments, banks should transfer scripts from the held-for-trade to the available-for-sale (AFS) category either at the acquisition cost or the book value or market value on the date of transfer, whichever is the least. These guidelines are expected to come into force from April 1, 07. The book value of the individual
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January 2007
securities would undergo a change with a corresponding debit to the prot and loss account. Earlier, banks were asked to provide for depreciation and hence this change was reected in the banks net prot gures. However, these guidelines would impact the banks operating prot. The guidelines also aim at providing banks boards room to x the internal limits for holdings in the HTM category. This indirectly implies that RBIs stipulation, which makes it mandatory for all banks to maintain at least 25% of their net demand and time liabilities as reserves under the SLR portfolio. Through these proposed set of guidelines, RBI has attempted to give a clear denition of securities which are eligible for classication under the HTM bucket. It states that only securities with xed or determinable payments having a xed maturity that a bank intends to hold and has the ability to hold till the term of maturity may be classied under the HTM category. These proposed norms prevent a bank from classifying any security as HTM, if it has sold or reclassied, more than 5 % of the HTM before maturity at the end of the previous nancial year. Performance of listed banks Strong growth in Indian economy assisted banks to increase their asset base. Comparison in asset base indicates that the private sector banks are in better position than the public sector banks in terms of asset growth. In the private banking space ICICI Bank, HDFC Bank & UTI Bank showed strong growth in their asset base whereas in the public sector bank Allahabad Bank, Canara Bank and Bank of Baroda lead the sector. State Bank of India which has the largest asset base in the country recorded a modest growth of 7.4%. Table 13: Assets of Some of the Listed Commercial Banks (Rs.bn) Bank Mar-05 Mar-06 % Change Private Sector Banks ICICI Bank 1,676.59 2,513.89 49.94% HDFC Bank 514.3 735.06 42.92% UTI Bank 377.44 497.31 31.76% J&K Bank 244.23 264.49 8.30% Karur Vysya Bank 78.84 90.07 14.24% Federal Bank 151.25 168.52 11.42% Kotak Bank 65.18 101.75 56.11% Yes Bank 1.28 4.16 225.00% Public Sector Banks State Bank of India 4,598.82 4,938.68 7.39% Bank of Baroda 94.66 113.39 19.79% Bank of India 949.78 1,122.74 18.21% IDBI Ltd 814.3 886.33 8.85% Corporation Bank 339.23 405.06 19.41%
Source: Respective banks and Global Research *9M FY07
H1 FY07 2,823.73 896.0* 649.7* 223.11 NA 310.0 135.22 62.82 4,938.69 1,265.56 1,232.57 932.35 462.85
Since the past few years, customer deposits of banks recorded strong growth. Private sector banks reported excellent performance as compared to their government owned peers. However, some of the public sector banks are giving tough competition to their private sector peers. In the private banking space, ICICI Bank was the leader in customer deposit growth as its deposit grew by 65.4% followed by HDFC Bank (53.5%) and Kotak Bank (52.7%). In January 2007 State Bank of India 23
the public sector banking space, IDBI Bank reported stellar performance as its deposits grew by 72% followed by Corporation Bank with growth rate of 20.7%. SBI, which is the largest bank in India, reported a growth of just 3.5%. Table 14: Customer Deposits of Some of the Listed Commercial Banks (Rs.bn) Bank Mar-05 Mar-06 % Change H1 FY07 Private Sector Banks ICICI Bank 998.19 1,650.83 65.38% 1894.99 HDFC Bank 363.543 557.96 53.48% 667.49* UTI Bank 317.12 401.11 26.49% 509.20* J&K Bank 216.45 234.85 8.50% NA Karur Vysya Bank 66.72 75.76 13.55% 81.07^ Federal Bank 134.76 151.92 12.73% 182.88 Kotak Bank 43.00 65.66 52.71% NA Yes Bank 6.63 29.1 338.91% 43.30 Public Sector Banks State Bank of India 3,670.48 3,800.46 3.54% 3,926.15 Bank of Baroda 81.33 93.66 15.16% 1,076.82 Bank of India 788.21 939.32 19.17% 1,032.94 IDBI Ltd 151.02 260 72.16% 309.53 Corporation Bank 272.33 328.76 20.72% NA
Source: Banks and Global Research Note: ^ June 06, * December 06 , NA Not available
Federal Bank reported a sharp jump of 150% in its earnings at the end of FY06 over FY05. Other major banks which reported strong growth in net prots include and IDBI (45%). In the public sector domain Bank of India reported a growth of 106.3% followed by IDBI Bank with 82.3% growth. Laggards included IndusInd Bank, whose net prot declined by 82.3%, followed by Bank of Maharashtra (-71%) and Vijaya Bank (-66.7%).
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Table 15: Net Prot of Some of the Listed Commercial Banks (Rs.mn) Bank Mar-05 Mar-06 % Change Private Sector Banks ICICI Bank 20,052.00 25,400.70 26.67 HDFC Bank 6,655.60 8,707.80 30.83 UTI Bank 3,345.80 4,850.80 44.98 J&K Bank 1,150.70 1,768.40 53.68 Karur Vysya Bank 1,053.40 1,353.50 28.49 Federal Bank 900.9 2,252.10 149.98 Kotak Bank 848.9 1,182.31 39.28 Yes Bank NA 2,700.00 NA Public Sector Banks State Bank of India 43,045.20 44,066.70 2.37 Bank of Baroda 6,768.40 8,269.60 22.18 Bank of India 3,400.50 7,014.40 106.28 Corporation Bank 4,021.60 4,444.60 10.52 IDBI Ltd 3,072.60 5,608.90 82.55
Source: Banks and Global Research Note: ^ June 06, * December 06 , NA Not available
H1 FY07 13,750.00 7,979.00* 4,471.40* 1,464.00 383.8^ 1,096.40 587.06 383.60 19,830.60 4,520.00 4,210.00 2,712.50 2,900.00
Most of the banks have CAR more than required 9% but considering the excellent credit growth, banks have to expand their capital base. IDBI Bank has one of the highest CAR in the industry with 14.66% followed by ICICI Bank (14.34%). Table 16: Capital Adequacy Ratio of some of the banks as of September 2006 Banks ICICI Bank Coperation Bank Bank of India Bank of Baroda UTI Bank IDBI Ltd
Source: CMIE
CAR (%) 14.34 13.32 11.85 12.93 11.83 14.66
Asset quality of Indian banks has improved signicantly in the last 2-3 years. Most of the banks have provided substantial amount so that average net NPA of Indian banking industry is around 1-2.25%. In the select banking universe as indicated below, Bank of baroda has the largest gross NPAs of around 3.44% at the end of H1FY07 followed by Bank of India, Bank of Baroda having gross NPAs of 2.96% during the same period. UtiBank has the best asset quality as its gross NPAs stood at just 1.2% of advances.
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Table 17: Non Performing Assets of some of the banks (September 2006) Gross NPA % of Advances Banks ICICI Bank Corporation Bank Bank of India Bank of Baroda UTI Bank IDBI Ltd
Source: CMIE
Net NPA % of Advances (Rs.bn) 15.45 1.34 7.89 5.44 2.67 7.359 0.90 0.48 1.07 0.79 0.68 1.29
( Rs.bn) 37.01 6.16 22.19 24.88 4.72 13.32
2.20 2.16 2.96 3.44 1.20 2.31
Consolidation is slowly in process There are many small and medium size banks across India; some of these are regional having strong network in their region. RBI is very actively tracking performance of these banks and taking strict action if the performance of regional banks is poor. In 2006, RBI put to following banks under moratorium. Ganesh Bank of Kurundwad (on the border of Maharashtra and Karnataka) will be merged with Federal Bank, a Kerala-based private bank. United Western Bank will be merged with IDBI
Many banks are coming forward to take over these banks to extend their network and mobilize more low cost fund. In case of UWB, players like Canara Bank, ICICI Bank, Citibank, Standard Chartered Bank, and a consortium of HDFC and the State Industrial Investment Corporation of Maharashtra had shown their interest in the bank. This shows that there is atleast a desire of consolidation amongst the industry players. RBI hikes CRR by 50bps to control overheating RBI has recently announced a 50 basis points hike in cash reserve ratio. This step by RBI preserved to curb overheating of the economy, check inationary expectations and suck out excess liquidity from the system. This would absorb Rs135bn from the system and this could put a pressure on the cost of funds as money supply would be constrained. This move could also force banks to reduce their credit exposure. Interest rates may also be impacted as a result. This hike to be undertaken in two stages, in rst step, the CRR will be raised from the present 5% to 5.25% effective from the fortnight beginning December 23, 2006. The second 25-basis point hike will be effective from the fortnight beginning January 6, 2007.
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January 2007
Financial Performance - FY06

SBI is the largest commercial bank in India. SBI as a group handles more than one fourth business of the Indian banking industry. During the last ve years, SBIs total balance sheet size grew at a CAGR of 9.4% and stood at Rs4,938bn at the end of FY06. The bank has wide distribution network with more then 14,000 branches and 5,600 plus ATMs. Currently the bank is focusing on its network and trying to mobilize more low cost deposits. We have analysed the performance of SBI based on various key parameters, which have been enumerated below: Analysis of Income Statement Net interest income growing steadily As mentioned earlier, SBI has reported a steady performance since the past few years. Interest income of the bank grew at a CAGR of 6.5% during the period 2001-2006 and stood at Rs.357.95bn at the end of Mar 31, 2006. During the same period, interest expense rose by a modest CAGR of 2.6% due to restructuring of its liabilities. This resulted in a CAGR of 13.3% in net interest income. The bank continued this growth momentum in 2006 to register an impressive year-on-year improvement in nancial performance. For the nancial year ended Mar 31, 2006 interest income of the bank grew by 10.4% over the previous year to Rs.357.95bn while interest expense rose by 9.1% to Rs.201.6bn. The overall result was that the net interest income of the bank jumped by 12.1% to Rs.156.36bn. The increase in net interest income was primarily driven by the strong balance sheet growth and increase in the share of demand deposits in total deposits during the year. Table 18: Historical Net Interest Income of the Bank FY01 FY02 FY03 FY04 FY05 FY06 (Rs. Mn) Interest Income 261,386 298,101 310,870 304,605 324,280 357,949 Interest Expense 177,560 207,288 211,095 192,742 184,834 201,593 Net Interest Income 83,826 90,812 99,776 111,863 139,446 156,356
Source: SBI, Global Research Analysis
Net Interest income of the bank grew at a CAGR of 13.3% during the last ve years.
CAGR 6.5% 2.6% 13.3%
Another major contributor to the growth of net interest income was the rapid growth in low cost deposits, which helped the bank in containing its cost of funds. During 2005-06, low cost deposits grew by 19.3% on a year-on-year basis, which helped contain the cost of funds. In addition, the redemption of India Millenium Deposit and Resurgent India Bonds has also helped the bank to lower its cost of funds. Another positive factor is that the interest expense to interest income ratio declined consistently from 69.5% in 2002 to 56.3% in 2006. We believe that the bank would sustain this ratio and can marginally improve on it mainly because of its resource mobilization power and cost control measures.
During 2005-06, demand deposits grew by 19.3% on a y-o-y basis.
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Chart 5: Interest Income and Interest Expense trends for the Bank
400 , 000 350 , 000 300 , 000
Non interest income of the bank increased at a CAGR of 13.7% over the last ve years.
(Rs Mn)
250 , 000 200 , 000 150 , 000 100 , 000 50 , 000 F Y01 FY02 F Y03 FY04 F Y05 F Y06
In t eres t In co m e
I n t e r e s t E xp e n s e
Non-interest income - leading from the front Historically, it has been the non-interest income that gave a llip to the earnings of the bank. The non interest income of the bank increased at a CAGR of 13.7% over the last ve years. In 2006 non-interest income (excluding sale of investment) made further headway as it improved by a stupendous 27.26% to reach Rs.73.9bn. The key contributor to strong growth in noninterest income has been other income. Other income contributed 14% in 2002 and 25.0% in 2006 to total non-interest income. The fees and commission income, which constituted around 54% of the total non interest income, recorded a growth of 12.7% in 2006 and stood at Rs.39.96bn. Going forward, we believe that the bank with its domestic expansion plan will give much needed thrust to its efforts to enhance fees and commission income. Income from foreign exchange transactions also recorded impressive gain of 80.8% to Rs.9.55bn. Forex income contributed 12.92% to the total non-interest income of the bank. Table 19: Trend in Non-Interest Income Rs. Mn FY01 FY02 FY03 FY04 Commission, exchange & brokerage 26,324 28,165 29,774 31,207 Sale of investments 3,419 3,516 16,946 30,735 Exchange transactions 3,036 4,076 4,636 5,030 Other Income 6,052 5,987 13,189 9,152 Total non-interest income 38,830 41,745 64,544 76,125
FY05 FY06 CAGR 35,447 39,962 8.7% 17,753 5,872 11.4% 5,282 9,548 25.8% 12,717 18,506 25.0% 71,199 73,887 13.7%
Income from investments also formed a part of the non-interest income of the bank in the past, though it has always been volatile. During 2005-06, there has been a signicant decline in prots from trading in investments to Rs.5.9bn compared to Rs.17.75bn in the previous year. Provision for loan assets The bank continues to provide aggressively against loan assets and has also created a oating provision. For the year ended Mar 06, the bank has made total provisions of Rs186.3bn (against Rs.165.96 in the previous year), which includes loan-loss provisions, provisions for standard assets and oating provisions. Pursuant to the change in provisioning requirement
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State Bank of India
January 2007
for standard assets from 0.25% to 0.4% as notied by RBI, the bank has made an additional provision during 2005-06. The bank has provided Rs.38.92bn towards provision for depreciation on investments in India, including amortisation of premium on Held to Maturity category as against Rs.23.27bn in 2004-05 and Rs.4.05bn towards standard assets as against Rs.1.15bn in 2004-05. Including this amount, the total provision held on standard assets amounts to Rs.9.13bn. Operating expenses Operating expenses of the bank grew in line with the growth in business. The total operating expenses grew at a CAGR of 7.2% in the last ve years. For the year ended Mar-06, operating expenses rose by 16.4% over the previous year and stood at Rs.117.3bn. Employee expenses, which always contributed substantial chunk of the total operating expenses, grew by 17.6% in FY2006 to Rs.81.2bn. During the year there was decline in the operational efciency as the cost to total operating income after provision improved from 60.7% in FY05 to 62.9% in FY06.
Operating expenses grew at a CAGR of 7.2% during the last ve years.
Table 20: Break up of Operating Expenditures Particulars FY01 FY02 FY03 FY04 FY05 FY06 CAGR 01-06 Employee expenses 60,116 51,528 56,887 64,477 69,073 81,230 6.2% Depreciation on banks property 4,019 4,250 4,937 6,983 7,522 7,291 12.7% Other operating expense 18,853 16,332 17,654 20,993 24,146 28,729 8.8% Total Operating Expenses 82,988 72,109 79,478 92,453 100,742 117,251 7.2%
Impressive Earnings Growth Overall, the bank reported a strong performance in the past ve years with its net protability of the bank recording a CAGR of impressive 22.4%. The year 2006 also turned out to be protable for the bank with the bank reporting a net prot of Rs.44.1bn, a rise of just 2.4% over FY2005. The improved earnings have also led to the improvement in the earning per share of the bank, which rose from Rs.30.5 in FY2001 to Rs.83.7 in FY06. Manpower productivity has also risen over the years as prot per employee increased steadily from Rs.0.2mn in FY05 to Rs.0.22mn in FY06. During the same period the business per employee has been also increased to Rs29.9mn. Table 21: Protability Indicators Rs. Mn Net Prot (Rs. mn) EPS (Rs.) RoAA (%) RoAE (%)
In FY06, he bank reported net prot of Rs.44.1bn, a rise of 2.1% over FY2005.
FY02 24,316 46.2 0.73% 17.0%
FY03 31,050 59.0 0.86% 19.2%
FY04 36,810 69.9 0.94% 19.7%
FY05 43,045 81.79 0.99% 19.4%
FY06 44,067 83.73 0.92% 17.0%
Despite the improved earnings over the years, some of the banks protability indicators like Return on Average Assets (RoAA) and Return on Average Equity (RoAE) seem to have deteriorated. This is primarily due to sharp rise in assets for expansion purpose. The return on average assets declined from 0.94% in FY04 to 0.92% in FY06, while the return on average
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equity down from 19.7% in FY04 to 17.0% in FY06. Maintained efficiency SBI has displayed a steady performance in the last few years in scaling up its efciency levels. Net Interest Income (NII) of the bank has witnessed a CAGR of 13.3% in the last ve years. The net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY01 to 3.4% in FY06. Spread of the bank has also increased from 1.7% in FY02 to 3% in FY06. Chart 6: Rising NII & NIM
180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 FY01
Credit book of the bank grew at a CAGR of 18.2% over the last 5 years.
3.5% 3.3% 3.1% 2.9% 2.7% 2.5% FY02 FY03 FY04 FY05 FY06 NIM (%)
NII (Rs mn)
NII
NIM
Higher Dividend The bank has recommended a higher dividend rate of 140% on equity shares, compared to the 125% dividend declared for the previous year. With the increase in earnings in future, the bank is expected to distribute handsome dividends to shareholders. Analysis of Balance Sheet Assets growing strongly The asset prole of SBI is spread over a wide array of asset categories similar to the other commercial banks in India. This has enabled the bank to minimise its risk exposure, yet achieve the expected returns. Due to the banks nature of operations, loan portfolio accounted for a substantial portion of the banks assets and it formed 52.98% of the total assets in FY06. Investments portfolio also accounted for the major portion of the banks assets. In 2006, investments portfolio accounted for 32.9% of the total assets. The total assets of the bank grew at a CAGR of 9.4% in the last ve years and stood at Rs.4,938.7bn at the end of FY06 representing an increase of 7.4% over FY2005.
Net NPL to net loans stood at 1.87% in 2006.
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January 2007
Chart 7: Break up of Assets

0.56% 4.53% 9.02%
32.91%
52.98%
Cash and Balances with RBI, banks and money at short and call notice Net Investment Loanes & Advances Net Fixed Assets Other Assets
Due to stiff competition prevailing in the industry total credit book of the bank grew at a CAGR of 18.2% over the last ve years. The asset growth in FY06 was mainly fuelled by 29.3% growth in gross loans and advances to customers and banks and stood at Rs.2,616.4bn. Project nance achieved total sanctions of Rs.238.86bn (fund based and non fund based) including syndication amount of Rs.140.95bn during the period ended March 2006 while mid corporate credit has increased by 42% to Rs194.3bn. The aggregate advances (excluding food and inter-bank advances) of the national banking group which includes personal , SME, agricultural and government banking increased from Rs.980.50bn in FY05 to Rs.1,337.81bn in FY06 registering a growth of 36.44% during the year. This is on account of an impressive growth of 39.72 % under agriculture and 31.49% growth in personal segment. Housing loans portfolio registered an increase of 28.11% growth. Personal banking advances increased from Rs.464.51bn in the previous year to Rs.610.67bn in FY06, showing a growth of Rs.146.16bn at the rate of 31.47 % against a growth rate of 40.12% in the previous year. The SME advances increased to Rs.456.53bn in FY06 from Rs.328.30bn in the previous year, recording a growth of 39.06 %. The criteria laid down by the government for growth in SME advances is 20%. Agricultural advances grew from a level of Rs. 205.26bn in March 05 to Rs.305.16bn as at the end of March 06. Growth during the year was Rs.99.90bn and the y-o-y growth rate works out to 49%. NPL is declining though provisions have also declined Asset quality of SBI has been improving since the past few years despite sharp rise in asset size. The ratio of gross NPAs to gross loans have come down from 11.95% in March 2002 to 3.88% in March 2006. With continuous cleaning of the balance sheet, net NPAs have now come down to 1.87%. The bank has provided for about 53% of its non-performing loans in 2006. The bank continued to improve its asset quality, as a result of which net NPLs, as a
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percentage of net customer assets, declined substantially from 2.65% as on 31st March 2005 to 1.87% as on 31st March 2006. The bank is looking forward to clean its balance sheet and write off some of its old problem loans. Gross NPL in absolute terms has declined from Rs 124.56bn in 2005 to Rs103.76bn in 2006. During the same period, coverage has declined from 57% in 2004 to 53% in 2006. In case of economic slowdown, SBIs asset quality is likely to take a hit as the bank has grown its asset coupled with an increase in gross NPLs. This coupled with low coverage ratio, is likely to affect bottom line in case of an economic slowdown. Table 22: Asset Quality of SBI Mar-04 Gross NPLs/Gross Loans Net NPLs/Net Loans Loan Loss Reserves/Gross Loans Loan Loss Reserves/NPLs*
Source: SBI, Global Research (*as per Annual Report)
Mar-05 6.10% 2.64% 3.0% 57%
Mar-06 3.96% 1.88% 1.8% 53%
7.83% 3.45% 4.0% 57%
Investment Portfolio The investment portfolio constituted around 32.91% of the total asset size of the bank at the end of FY06. The banks investments declined by 17.54% from Rs.1,971bn in FY05 to Rs.1,625bn in FY06. A major portion of the investment was in the domestic market in government and other approved securities. The overall domestic investment portfolio has, however, shrunk from Rs.1,954bn in FY05 to Rs.1,593bn in FY06 as the bank redeemed some of its investment to divert funds to boost loans and advances portfolio. During the year, the bank further de-risked the investment portfolio to manage interest rate risk through a combination of measures such as shifting securities amounting to Rs.297.88bn from AFS to HTM, use of derivatives, reducing the modied duration, etc. The government is planning to bring an ordinance to empower the RBI to x the level of banks SLR. A cut in SLR rate at this point would infuse future liquidity into the system. Thought the law allows RBI to lower the banks SLR requirements below exciting 25%, we believe that the central bank unlikely to take such steps, as concerns over excess liquidity in the system and claiming ination persist. Funding Structure Historically, around 5-6% of the balance sheet was funded by shareholders equity with the rest coming from customers and inter-bank deposits. The bank has been able to expand its deposit base by rapid expansion in semi-urban and rural areas of the country and by way of introducing number of innovative products.
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January 2007
Chart 8: Break up of liabilities

8.2% 7.9% 59.7% Deposits Borrowings Subordinated Debt Other Libilities and Provisions Total Shareholders Equity
11.9%
6.3% 6.0%
Growing low cost deposits lead to lower cost of funds The deposit growth for SBI has been satisfactory, especially the term deposit category. Total deposits grew at a CAGR of 9.4% over the period 2002-06 to reach Rs3,800bn, with low cost deposits registering a CAGR of over 15.4% during the same period. Contribution of low cost deposit to total deposit during the period too has moved up from just 36.48% in FY02 to over 47.55% in FY06. As mentioned earlier, the redemption of India Millennium Deposit and RBI bonds has also helped the bank to lower the cost of deposits. As at the end of March 2006, the share of the banks deposits in total resources was at 75.9%, with outstanding deposits at Rs.3,800bn, reecting a growth of 19.3% over the previous year. Out of this, savings bank deposits, an important part of low cost deposits, grew by 18.8%. Chart 9: Movement of Deposit Growth
2,500,000 2,000,000 (Rs.bn) 1,500,000 1,000,000 500,000 0 FY02
Demand Deposits
50.00% 40.00% 30.00% 20.00% 10.00% 0.00% FY03 FY04 FY05

Term Depos its
FY06
CASA (%)
Savings Depos it
On the back of robust low cost deposit growth, cost of funds for SBI has seen a substantial reduction. With growing reach through larger branch and ATM network, we opine that the low cost deposits would continue to be on current levels to maintain the cost of funds. This, according to us, would play a critical role to maintain Net Interest Margins (NIMs) at current levels in time to come.
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Borrowings and subordinated debt Borrowing from RBI and other banks and nancial institutions constituted around 9.5% of the total liabilities and shareholders equity of the bank while subordinated debt comprised around 1.8% of the same. In FY06, borrowings of the bank increased by 59.7% to Rs.1,993bn. Subordinated debt outstanding at the end of FY06 stood at Rs.86.7bn and is a long-term unsecured non-convertible debt which qualies as Tier II risk based capital. Capital Adequacy Ratio remains on lower side Despite a subsequent strong growth in assets, the Capital Adequacy Ratio (CAR) at the end of the year was at 11.88%, above the benchmark requirement of 9% prescribed by the Reserve Bank of India. Of this, Tier I capital amounted to 9.36%, while Tier II Capital was at 2.52%. Table 23: CAR movements (%) Particulars FY01 FY02 FY03 FY04 FY05 FY06 Tier - I 8.58% 9.22% 8.81% 8.34% 8.04% 9.36% Tier II 4.21% 4.13% 4.69% 5.19% 4.41% 2.52% Capital Adequacy Ratio 12.79% 13.35% 13.50% 13.53% 12.45% 11.88%
CAR at the end of FY06 was at 11.88%.
During the year 2005-2006, the bank issued by way of private placement, unsecured, subordinated bonds of the face value of Rs.1mn each for cash at par at a xed rate of 7.45% p.a., payable annually, for an aggregate amount of Rs.32.83bn to augment its Tier II capital. These bonds are redeemable on 05.05.2015. The face value of bonds outstanding as at 31st March 2006 is Rs.32.83bn. Capital Adequacy Ratio (CAR) of SBI has been above the mandatory levels of 9%. But the same is on the lower side when compared to other peers in the industry. This has been mainly due to very robust credit book growth registered by the bank. Considering the banks continued healthy credit growth, especially in view of robust economic upsurge, we believe that a large capital infusion is mandated in order to sustain the growth going forward. Also, the capital infusion would be very essential to smoothly progress to Basel II guidelines.
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January 2007
First Half Results

Interest income on advances in H1FY07 has registered an impressive growth of 37.48% YoY. Excluding the impact of one-time items, Net Interest Income (NII) is up by 8.87% over H1FY06. NII as on H1FY07 is Rs.77.83bn as against Rs.78.61bn in H1FY06 and Rs.71.49bn adjusted for one-time item in H1FY06. Net Interest Margin (NIM) of the bank for the half year ended Sep 06 was at 3.32% compared to 2.92% as on Mar 06 (adjusted for one time interest income) and thus core NIM has improved by 40 bps. Non-interest income (excluding treasury income) grew well by 19.58% from Rs.21.87bn in H1FY06 to Rs.26.16bn in H1FY07. Operating expenses registered a moderate increase of 6.78%. Staff cost, which increased by 5.56%, would have been much lower but for the on-going payments to staff opting for early exit. Total provisions made for this half year were at Rs.33.26bn, as against Rs.29.84bn made in H1FY05-06. Provision for depreciation in investment was Rs.15.27bn as against Rs.23.97bn during H1FY06. Provision made during 2QFY07 was only Rs.4.23bn mainly on account of amortization of premium in HTM category. Provision for taxes stood at Rs.13.63bn (deferred tax Rs.1.76bn & FBT Rs 225mn) as against Rs.4bn (including deferred tax of Rs.3.43bn and FBT Rs190mn) in H1FY06. Adjusting tax provision for H1FY06 based on tax provisions for full year FY05-06, the net prot for H1FY07 would be much higher than that for H1FY06. The bank has posted a net prot of Rs19.83bn for H1FY07. The net prot for this half would have been higher but for two factors: presence of one time item of interest on income tax refund of Rs7.12bn in H1FY06 and much higher tax provisions in H1FY07. The net prot for H1FY06 was Rs.24.38bn. The banks domestic deposits growth has been excellent at Rs.152.24bn during 2QFY07, despite less reliance on bulk corporate deposits, mainly due to pan-India network of 9,306 branches. The banks deposits grew by Rs381.73bn to Rs.3,926.15bn as at the end of September 2006 from Rs.3,544.42bn as at the end of September 2005 recording a growth of 10.77%. The cost of deposits declined from 4.64% in September 2005 to 4.51% in September 2006 helped by improvement in CASA Ratio. CASA ratio of the bank improved from 39.48% as on September 2005 (excl. IMDs) to 42.64% as on September 2006, an increase of 316 bps, helped by vast network of the bank and focus on salary / new accounts. The banks domestic advances (excl. food) grew by Rs172.93bn during 2QFY07. Gross advances grew to Rs.2,888.40bn as at the end of September 2006 from Rs.2,383.51bn as at the end of September 2005 i.e. a growth of Rs.504.89bn equal to 21.18% YoY. SBIs domestic advances (excl. food) grew to Rs.2,497.03bn as at the end of September 2006 from Rs.2,009.91bn as at the end of September 2005 recording a YoY growth of 24.24%. The average yield on advances improved to 8.55% in September 2006 from 7.81% in September 2005. Due to the volume growth in advances and improvement in yield, interest income on advances went up by 37.48% compared to H1FY06.
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As on 30th September 2006, the advances in personal segment grew (YoY) by Rs.136.02bn. The outstanding personal segment advances aggregated Rs658.10bn at the end of September 2006. The bank continues to perform well in housing nance. As on 30th September 2006, housing advances grew (YoY) by Rs62.30bn and the total outstanding, as at the end of September 2006 was Rs.345.71bn. Housing loans disbursed during H1FY07 are around Rs.48bn. The growth in retail advances is 26.05% over September 2005. Retail advances constitute 25.75% of the banks gross domestic advances as at the end of September 2006 as against 24.73% as on September 2005. Housing loans constitute 52.53% of its retail advances as on September 2006. Agricultural advances grew to Rs.306.10bn as at the end of September 2006 from Rs.237.08bn as at the end of September 2005 recording a growth of 29.11%. Disbursements during the half-year ended September 2006 were at Rs.106.91bn. Gross NPA and Net NPA ratio have declined from 5.26% and 2.27% as on 30th September 05 to 3.57% and 1.67% respectively as on 30th September 06. Chart 10: Break up of loan book
7% 10% 2% 25%
10%
11% 11% Mid Corporates PER AGL International Operations

24%
SIB Top Corporates Others Corporates Food
The bank added Rs.55.43bn to its capital during H1FY07 by way of upper Tier-II subordinated debt, which helped the bank in improving its capital adequacy ratio. Total Tier II bonds mobilization in last 11 months was Rs.102.26bn. Tier I capital adequacy ratio of the bank as on Sep 06 was 8.74%. The bank has the cushion to raise Tier I hybrid debt of over Rs.40bn to improve its Tier I ratio.
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State Bank of India
January 2007
Outlook and Future Prospects

Indian banking sector has been showing a strong credit growth of over 30% dominated by non-food credit on a y-o-y basis. Going forward, credit growth is expected to slowdown as most banks have hiked their Prime Lending Rate (PLR). Hike in PLR rate would result in a substantial portion of the loan book of the bank getting re-priced resulting in better yields for most of the banks. However, cost of funds for the banks would rise substantially for those banks which have hiked their deposit rates to garner low cost deposits. With the rise in interest rates, some of the public sector banks have aggressively priced their deposits to attract retail customers and are offering above 8.5% on deposit for the period of twenty months. We believe that deposit mobilization is not a cause for concern for most of the banks. For some of the public sector banks, curbs on branch expansion though temporary will affect the low cost deposit mobilization in the short term. However, the major challenge remains to maintain NIM. SBIs changing business processes through initiatives such as strategic business units, specialized credit cells for loan processing and greater customer orientation are paying dividend across the board. Retail advances in the personal segment kept up the tempo of growth and comprise almost a quarter of its advances, with housing nance constituting over one half of the its retail advances. The mid-corporate group has been a major success, being the single largest contributor to the growth in credit. SME advances too have grown signicantly and, perhaps more importantly, their quality improved. Disbursements to agriculture went up by a massive 83% during the year. The bank is a leading player in infrastructure nance and syndication of loans. Other growth sectors for the bank are education, healthcare and tourism. The bank maintains its drive on the technology front to enhance customer service, increase productivity, and manage risk better. After having computerized all its branches, it has been moving swiftly to implement real time on-line banking. Over 4,169 branches, covering more than 65% of the total business of the bank, have so far been brought under core banking, in addition to all of the 4,783 branches of associate banks being fully networked on core banking. With 5,624 ATMs of SBI and more than 3,500 ATMS of associate banks, the State Bank Group has the largest network of ATMs in the country. Internet banking is now provided at 4,020 branches with more than 1.07mn individual and 43,000 corporate users. The bank is in the process of widening its reach both organically and in-organically in both domestic and international markets. The bank is expected to realize signicant operating efciencies by leveraging its technology platforms as the bank grows both domestically and internationally. In addition, the bank is expected to invest more on cutting edge technology to support its growth initiatives. The bank is expected to continue to achieve a higher return on its shareholders equity and diversify its business with more innovative products and services. The banks credit card unit is doing well as it caters to diverse customers and contributes more to the bottomline of the bank. Focus on alternative delivery channels are also expected to further increase the banks efciency. The bank is also expected to continue to strengthen its focus on project advisory services.
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Strength/ Opportunities:
The growth for SBI in the coming years is likely to be fueled by the following factors: Continued effort to increase low cost deposit would ensure improvement in NIMs and hence earnings. Growing retail & SMEs thrust would lead to higher business growth. Strong economic growth would generate higher demand for funds pursuant to higher corporate demand for credit on account of capacity expansion.
Weakness/ Threats:
The risks that could ensue to SBI in time to come are as under: SBI is currently operating at a lowest CAR. Insufcient capital may restrict the growth prospects of the bank going forward. Stiff competition, especially in the retail segment, could impact retail growth of SBI and hence slowdown in earnings growth. Contribution of retail credit to total bank credit stood at 26%. Signicant thrust on growing retail book poses higher credit risk to the bank. Delay in technology upgradation could result in loss of market shares. Management indicated a likely pension shortfall on account of AS-15 to be close to Rs50bn. Slow down in domestic economy would pose a concern over credit off-take, thereby impacting earnings growth.
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January 2007
Valuation and Recommendation

SBI is the market leader in the Indian banking industry. The bank has been a consistent performer since the past few years. While valuing banks we have consistently been using the Dividend Discounting Method (DDM) in our earlier researches as we believe it is the most suitable method to value banks because of the nature of banking business. However, we have now included a comparative valuation method (Price to Book Value) which more accurately reects the current market expectations about the stock. In case of DDM the cash ows for the investor includes potential dividends. Therefore, our valuation of SBI is based on discounting the future stream of dividends. The DDM model constructed by us is based on a 4-year forecast of dividends as cash ows (FY2007-10) for SBI. The cash ow for the forecasted period and the terminal value is then discounted back at the discount rate, to provide the total net present value (NPV) of the bank. In our calculations, we have made the following assumptions in order to arrive at the equity value of SBI. 1. 2. 3. 4. 5. Cost of capital of 13.59% derived using Capital Asset Pricing Model (CAPM) Risk free rate of 7.59%, as per the yield on the 10-year bond issued by the Government. Equity risk premium of 6% Beta of 1.0 for last 5 years of SBI. Growth rate of 9% for SBI since the bank has pan-India presence and holds tremendous growth potential as compared to most of its peers in the Indian banking space.
Table 24: DDM Valuation Amounts in Rs Mn Dividend Expected NPV of Dividends PV of Terminal Value Total Value No of shares outstanding (mn) Value Per Share (Rs)
2007 F 11,052 10,706 346,929 399,429 526 759
2008 F 14,736 12,567
2009 F 19,473 14,618
2010 F Terminal Value 22,105 524,923 14,609
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Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and cost of capital is provided as below. The table provides estimated fair values for SBI shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives.
Table 25: Sensitivity Analysis 7.0% 785 647 550 480 426 Growth Rate 8.0% 9.0% 984 1,337 772 967 636 759 542 626 473 534 10.0% 2,134 1,313 950 746 616 11.0% 5,632 2,094 1,289 934 734
Cost of Capital
11.59% 12.59% 13.59% 14.59% 15.59%
Source: Global Research
Peer Group Valuation The peer group valuation is performed to compare the intrinsic value of SBI arrived at using the DDM calculation. The peer group comparison uses Balance Sheet and P&L multiples of listed and comparable public banks which reect the protability and growth potential of a stock. We believe that the comparative valuation for the banking sector is more appropriately reected through the price to book value (P/BV) multiple. Therefore, the peer group valuation is done by comparing the P/BV multiples enjoyed by other public banks in the sector. The book value multiples of a stock are a reection of various factors such as the expected protability, growth potential as perceived by the market, predictability and sustainability of revenues, quality of earnings and the quality of management among others. The adjusted P/BV multiple for the major public banks on the Bombay Stock Exchange based on the nancial results for the H1FY06 ranges from 0.94x to 2.93x with the average multiple being at 1.65x. We believe that, its not reasonable to compare SBI with other smaller banks in the PSU segment. As SBI is the largest player in the Indian banking industry it should command premium valuations as compared to its peers in the PSU banking space. As such the multiple for SBI should lie somewhere between PSUs and private banking universe. Since the major private banks trade at around 5x to 6x of their book, a multiple of 3x to SBI seems to be appropriate. SBIs stock valuation comes to Rs.1,463 based on its estimated adjusted book value for FY2007. As the book value multiples vary with time and are dependent on several factors such as market sentiment and other qualitative factors, we have provided 20% weightage to the book value multiple and 80% to the DDM value calculation.
40
State Bank of India
January 2007
Fair Value Per Share (Rs.) As per DDM method As per P/B multiple Weighted Price
Source: Global Research
759 1,463 900
Weightage 80% 20%
Sum-of-the-parts methodology SBI has number of valuable banking and other subsidiaries. We have valued SBI on a sumof-the-parts methodology to capture the true value of the associate banks and non-banking businesses. SBI has seven associate banks and comprised a signicant portion of the book value. Similarly, other businesses of the bank are growing signicantly faster than the core banking business and will make an increasing part of the market value. Table 26: Sum of Part Valuation Multiple SBI (DDM valuation) Associate Banks Investment Banking Mutual Fund Insurance Primary dealers Credit cards Total
Note: 1 year forward Source: Global Research
Book Value PAT AUM (Bn) NBAP (Bn) Book Value PAT
190.05 1,042.13 180 1.48 1,092.2 670.32
1.3 12 0.06 15 0.8 15
Ownership Value/Share 899.82 247.06 86 20.43 63 8.13 74 31.30 66 1.10 60 1.40 1,209.24
Based on our sum-of-parts valuation methodology, we have valued SBIs share price at an intrinsic value of Rs 1,209 per share. The stock currently trades at around Rs.1,223, which implies that the value arrived at using the sum-of-the-parts valuation methodology is slightly lower than the current market price by 1.13%. At the current market price the stock seems to be fairly priced. The bank currently trades at 14.5x and 12.1x of its earnings for FY07E and FY08E respectively and 3.3x and 2.96x of its adjusted book value. The bank holds tremendous growth potential, going forward. As the economy is on a roll and rising disposable income with the people, we believe that the bank is a proxy to Indian economic growth. However, the current market price already captures the future growth potential of the stock. Hence, we recommend a Hold on the stock with a medium term perspective.
January 2007
State Bank of India
41
Balance Sheet
State Bank of India FY04 435,666 1,873,758 1,596,404 41,945 9,019 158,750 17,128 50,514 (16,994) 1,856,765 1,617,576 (38,241) 1,579,335 60,445 (33,994) 26,451 179,935 4,078,153 3,186,187 502,908 795,959 1,887,320 134,313 208,912 346,428 3,875,840 3,670,475 566,123 949,072 2,155,281 191,843 130,698 365,091 4,358,107 3,800,461 679,957 1,127,239 1,993,265 306,412 86,738 468,644 4,662,255 4,275,518 427,552 1,068,880 2,779,087 275,771 99,749 515,508 5,166,546 4,874,091 584,891 1,218,523 3,070,677 289,560 109,724 567,059 5,840,433 5,556,463 833,470 1,389,116 3,333,878 306,933 118,501 623,765 6,605,663 393,221 2,001,732 1,750,188 37,295 11,173 133,045 17,674 52,358 (30,752) 1,970,979 2,043,312 (19,568) 2,023,745 68,124 (41,147) 26,977 183,907 4,598,829 445,600 1,686,910 1,414,481 35,352 13,849 101,004 24,033 98,191 (61,568) 1,625,342 2,618,153 (1,738) 2,616,415 75,047 (47,517) 27,529 223,808 4,938,696 441,431 1,617,716 1,343,757 37,473 13,156 88,884 26,436 108,010 (89,069) 1,528,648 3,246,510 (14,724) 3,231,786 81,801 (54,879) 26,922 246,189 5,474,976 451,802 1,582,394 1,290,007 38,972 12,630 91,550 29,344 119,891 (115,970) 1,466,425 3,976,975 (30,632) 3,946,343 89,163 (63,796) 25,367 295,427 6,185,364 418,131 1,557,677 1,251,307 40,141 12,251 94,297 31,398 128,284 (145,565) 1,412,112 4,832,024 (49,960) 4,782,064 97,188 (72,543) 24,645 354,513 6,991,465 FY05 FY06 FY07 (E) FY08 (E) FY09 (E) Rs Mn FY10 (E) 435,863 1,569,695 1,251,307 41,345 12,251 97,126 32,968 134,698 (175,390) 1,394,305 5,701,789 (72,767) 5,629,022 104,963 (81,989) 22,973 425,415 7,907,578 6,334,368 950,155 1,583,592 3,800,621 325,349 127,982 686,141 7,473,840
Particulars (Rs mn.)
42
5,263 116,051 35,106 43,712 1,030 1,148 3 202,313 4,078,153 5,263 140,872 35,106 52,539 1,030 3,029 2,880 3 240,721 4,598,829 5,263 170,209 35,106 58,745 4,181 2,934 3 276,441 4,938,696 5,263 196,830 35,106 64,113 4,181 2,934 4 308,430 5,474,976 5,263 227,043 35,106 70,401 4,181 2,934 4 344,932 6,185,364 5,263 262,771 35,106 75,544 4,181 2,934 4 385,802 6,991,465
Assets Cash and Balances with RBI, banks and money at short and call notice Gross Investments -in Government Securities -in Other approved securities -in Shares -in Debentures and Bonds -in Subsidiaries and joint venture -in Others Less : Provisions for investment depreciation Net Investments Loans & Advances - Gross Less : Provisions Loans & Advances - Net Fixed Assets Less : Depreciation Net Fixed Assets Other Assets Total Assets
State Bank of India
Liabilities Deposits - Demand Deposits - Savings Bank Deposits - Term Deposits Borrowings Subordinated Debt Other Liabilities and Provisions Total Liabilities
January 2007
Owners Equity Equity Capital Statutory Reserve Share Premium Account Investment Fluctuation Reserve Revenue and Other Reserve Capital Reserve Foreign Currency Translation Reserve Balance in prot & loss account Total Shareholders Equity Total Capital
5,263 304,206 35,106 82,044 4,181 2,934 5 433,738 7,907,578
Operating Statement
FY04 304,605 192,742 111,863 31,207 30,735 5,030 9,153 76,125 36,935 4,855 4,491 141,707 64,477 6,983 20,993 92,453 49,254 49,254 12,444 36,810 69,074 7,522 24,146 100,742 65,216 65,216 22,171 43,045 81,230 7,291 28,729 117,251 69,062 69,062 24,995 44,067 83,181 7,362 30,248 120,791 68,257 68,257 23,890 44,367 90,465 8,916 34,463 133,844 81,549 81,549 28,542 53,007 100,286 8,747 39,136 148,169 96,431 96,431 33,751 62,680 35,447 17,753 5,282 12,717 71,199 12,040 23,384 9,264 165,958 39,962 5,872 9,548 18,506 73,887 1,478 38,985 3,468 186,313 44,358 2,427 5,251 20,356 72,392 12,986 27,501 3,641 189,048 49,237 3,165 5,776 22,392 80,570 15,908 26,901 3,823 215,392 55,146 3,115 6,354 24,631 89,246 19,328 29,596 4,014 244,601 61,763 3,139 6,989 27,094 98,986 22,807 29,824 4,215 275,641 110,257 9,447 44,103 163,806 111,836 111,836 39,143 72,693 FY05 324,280 184,834 139,446 FY06 357,949 201,593 156,356 State Bank of India FY07 (E) FY08 (E) 396,051 464,824 235,266 283,370 160,785 181,454 FY09 (E) 538,769 330,476 208,293 Rs Mn FY10 (E) 622,229 388,727 233,502
Particulars (Rs mn.) Interest Income Interest Expense Net Interest Income
January 2007
3.4 36,810 (9,256) (5,789) (21,023) (741.75) 3.4 3.4 43,045 (24,821) (6,579) (10,708) (937.50) 3.9 3.9 44,067 (29,338) (7,368) (6,327) (1,033.40) 3.9 3.9 44,367 (26,620) (11,052) (5,368) (1,326) 4.2 4.2 53,007 (30,214) (14,736) (6,288) (1,768) 4.3 4.3 62,680 (35,728) (19,473) (5,143) (2,337) 4.0 4.0 72,693 (41,435) (22,105) (6,500) (2,653) 5.0
State Bank of India
Commision, exchange & brokerage Prot on sale of investments Prot on exchange transactions Other Income Total non-interest income Provision for NPAs Provision for investment depreciation Provision for others Total Operating Income Operating Expenses Employee expenses Depreciation on banks property Other operating expense Total Operating Expenses Operating Prot PBT Provision for Income Tax Net Prot
P&L Appropriation Account Opening balance of retained earnings Net prot Transfer to Statutory Reserve Proposed Dividend Transfer to General Revenue Tax on proposed dividend Cl balance of retained earnings
43
Cash ow Statement
2004 2005 State Bank of India 2006 2007 (F) 2008 (F) 2009 (E) 2010 (E)
Amounts in Rs Mn
44
109,525 49,713 6,983 4,875 3,545 6 3,957 (1,613) 42,059 (106,977) (135,091) (238,770) 41,277 224,954 10,304 16,248 (25,899) 2,548 (149,922) (137,052) (456,449) 57,530 484,289 (8,999) (71,223) (18,017) (27,807) (64,636) 311,563 (594,201) 114,569 129,985 (60,377) 38,387 (4,564) 60,391 (115,480) 69,194 (628,357) (30,641) 475,058 (22,381) 46,864 (25,216) 627 (110,779) 35,322 (730,465) 13,789 598,573 (49,238) 51,551 (30,310) 22,494 122,114 65,216 7,522 23,384 3,545 18 3,957 (3,932) 22,405 125,027 68,374 7,291 40,433 16 4,011 (66) 4,968 116,106 68,257 7,362 27,501 12,986 133,273 81,549 8,916 26,901 15,908 154,102 96,431 8,747 29,596 19,328 (169,054) 24,717 (855,050) 17,374 682,373 (59,085) 56,706 (36,088) (14,951) (9,555) (2,561) 1,613 (10,503) (8,066) (854) 3,932 (4,988) (7,860) (3,547) 66 (11,342) (6,754) (6,754) (7,362) (7,362) (8,025) (8,025) 9 (3,957) (4,474) (8,422) (16,377) 452,043 435,666 17 (3,957) (5,752) (9,693) (42,488) 435,709 393,221 32,830 (17,620) (4,011) (6,579) 4,620 53,669 391,931 445,600 13,011 (11,052) 1,959 (4,169) 445,600 441,431 9,975 (14,736) (4,762) 10,371 441,431 451,802 8,778 (19,473) (10,695) (33,671) 451,802 418,131
Operating Operating (a) PBT Depreciation on xed assets Depreciation on investments/ Loans & other provisions Deferred Revenue Expenditure W/off (Prot)/ Loss on sale of xed assets Payment/Provision for interest on Subordinary debt Dividend Received from subsidiaries Total Provisions & Amortisations for NPAs
173,914 111,836 9,447 29,824 22,807 (135,782) (12,017) (869,764) 18,416 777,905 (70,903) 62,377 (41,795) 38,132
State Bank of India
Working Capital (b) Dec/(Inc.) in Investment Dec/(Inc.) in advances (Dec)/Inc. in borrowings (Dec)/Inc deposits (Inc.)/Dec in other assets (Inc.)/Dec other liabilities & provisions Direct taxes paid Total Operating (a+b)
Investing Fixed assets Investment in Subsidiaries /JVs Dividend recevied Total Investing
(7,775) (7,775)
January 2007
Financing Proceeds from issue of subordinated debt Redeemable bonds Interest on bonds Payment of dividends Total Financiang
9,480 (22,105) (12,624) 17,732 418,131 435,863
Net change in Cash Cash & Short-term funds at the beginning of the year Actual cash at end
Fact Sheet
Rs Mn Particulars FY04 Protability - Return on Average Assets 0.94% - Return on Average Equity 19.7% - Net interest income/ Total Op. Income 46.3% - Non-interest income/ Total Op. Income 53.7% - Commissions/ Total Op. Income 22.0% - Dividend payout ratio 15.7% Margins - Net income/ revenues 12.1% 16.2% - Operating prot / revenues - Interest Expense to Interest Income 63.3% - Interest Income to Avg Interest Earning Assets 8.21% - Interest Expense to Avg Interest Bearing Liabilities 5.65% - Net Spread 2.55% - Net Interest Margin 2.99% Efciency - Cost to Total Op Income 65.2% - Staff Expense to Total Op Income 45.5% - Administrative Expense to Total Op. Income 14.8% - Cost to Average Total Assets 2.36% Liquidity - Loans to Interest Earning Assets 41.8% - Loans to Deposits 50.8% - Gross Loans to total Deposits 50.8% - Deposits to Equity 15.7 - Gross Loans to Assets 39.7% - Liquid assets to total Assets 10.7% Credit Quality - Provisions to Total Op Income 32.7% - Provisions to Average loans 2.47% - Non Performing Loans - Gross (Rs mn) 126,672 - Non Performing Loans - Net (Rs mn) 54,417 - Loan Loss Reserve (Rs mn) 64,124 - Gross NPLs to Gross Loans 7.83% - Net NPLs to Net Loans 3.45% - Net NPLs to (Equity+Loan loss reserve) 23.0% - Loan Loss Reserve to Gross Loans 4.0% - Loan Loss Reserve to NPL 117.8% - Loan loss provision to Gross NPL 50.62% Capital Adequacy - Equity to Total Assets 5.0% - Equity to Gross Loans 12.5% Constitution of Total Income - Net Interest Income to Total Op. Income 52.9% - Fees & Comm. to Total Op. Income 22.0% - Investment Income Total Op. Income 18.3% - FX Income to Total Op. Income 3.6% Operating Performance - Change in Interest Income -2.0% - Change in Fees and Commission 4.8% - Change in Investment Income 81.4% - Change in Fx Income 8.5% - Change in Other Income -30.6% RATIOS USED FOR VALUATION - Shares in Issue (mn) 526 - EPS (Rs) 69.9 - Dividend Declared (%) 110% - Book Value Per Share (Rs) 384.4 - Adjst. Book Value Per Share (Rs) 281.0 - Market Price Year End (Rs)* 605 - P/E 8.7 - P/BV 1.57 - P/ABV 4.21 * Market Price for FY07 onwards is price as of Jan 12, 2007 FY05 0.99% 19.4% 57.1% 42.9% 21.4% 15.3% 13.3% 20.1% 57.0% 7.85% 4.91% 2.94% 3.33% 60.7% 41.6% 14.6% 2.32% 46.6% 55.7% 55.7% 15.2 44.4% 8.6% 26.9% 0.66% 124,557 53,489 62,195 6.01% 2.64% 20.2% 3.0% 116.3% 49.93% 5.2% 11.8% 76.8% 21.4% -3.4% 3.2% 6.5% 13.6% -42.2% 5.0% 39.0% 526 81.79 125% 457.4 355.8 657 8.0 1.44 2.98 State Bank of India FY06 FY07 (E) FY08 (E) FY09 (E) FY10 (E) 0.92% 17.0% 60.3% 39.7% 21.4% 16.7% 12.3% 19.3% 56.3% 7.89% 4.93% 2.96% 3.40% 62.9% 43.6% 15.4% 2.46% 55.9% 68.9% 68.9% 13.7 53.0% 9.0% 23.6% 0.06% 103,758 49,064 46,304 3.96% 1.88% 17.1% 1.8% 94.4% 44.63% 5.6% 10.6% 83.1% 21.4% -17.8% 5.1% 10.4% 12.7% -66.9% 80.8% 45.5% 526 83.73 140% 525.3 432.0 968 11.6 1.84 2.95 0.85% 15.2% 61.7% 38.3% 23.5% 24.9% 11.2% 17.2% 59.4% 8.00% 5.32% 2.69% 3.25% 63.9% 44.0% 16.0% 2.32% 62.4% 75.9% 75.9% 13.9 59.3% 8.1% 23.3% 0.44% 113,628 51,709 51,028 3.50% 1.60% 15.8% 1.6% 98.7% 44.9% 5.6% 9.5% 78.2% 23.5% -13.3% 2.8% 10.6% 11.0% -58.7% -45.0% 10.0% 526 84.3 210% 586.0 487.8 1223 14.5 2.09 3.30 0.91% 16.2% 62.6% 37.4% 22.9% 27.8% 11.4% 17.5% 61.0% 8.40% 5.71% 2.69% 3.28% 62.1% 42.0% 16.0% 2.30% 67.8% 81.6% 81.6% 14.1 64.3% 7.3% 21.7% 0.44% 127,661 59,195 51,660 3.21% 1.50% 16.4% 1.3% 87.3% 40.5% 5.6% 8.7% 76.9% 22.9% -11.0% 2.7% 17.4% 11.0% 30.4% 10.0% 10.0% 526 100.7 280% 655.4 542.9 1223 12.1 1.87 2.96 0.95% 17.2% 63.5% 36.5% 22.5% 31.1% 11.6% 17.9% 61.3% 8.64% 5.87% 2.76% 3.34% 60.6% 41.0% 16.0% 2.25% 73.1% 87.0% 87.0% 14.4 69.1% 6.0% 21.6% 0.44% 144,961 66,949 66,619 3.00% 1.40% 16.3% 1.4% 99.5% 46.0% 5.5% 8.0% 77.3% 22.5% -10.8% 2.6% 15.9% 12.0% -1.6% 10.0% 10.0% 526 119.1 370% 733.1 605.8 1223 10.3 1.67 2.67 0.98% 17.7% 64.1% 35.9% 22.4% 30.4% 11.7% 18.0% 62.5% 8.84% 6.09% 2.76% 3.32% 59.4% 40.0% 16.0% 2.20% 76.4% 90.0% 90.0% 14.6 72.1% 5.5% 20.6% 0.43% 171,054 78,806 79,386 3.00% 1.40% 16.9% 1.4% 100.7% 46.4% 5.5% 7.6% 76.4% 22.4% -9.7% 2.5% 15.5% 12.0% 0.8% 10.0% 10.0% 526 138.1 420% 824.1 674.4 1223 8.9 1.48 2.45
January 2007
State Bank of India
45

Banking 2006

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Global Research - India

Global Investment House

State Bank of India

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

Source: Bombay Stock Exchange

State Bank of India

Global Research - India

Global Investment House

State Bank of India

State Bank of India

Global Research - India

Global Investment House

Financial Institutions / Banks

Overseas investors including FIIs/OCBs/NRIs GDR Issue Others

State Bank of India

Global Research - India

Global Investment House

Key Areas of Operations

Source: SBI, Global Research

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

Strategy and New Developments

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

Indian Banking Sector

State Bank of India

Global Research - India

Global Investment House

State Bank of India

Global Research - India

Global Investment House

11,004.3 411.2 10,593.1 17,002.0 2,480.3 14,521.7 7,391.5 7,189.8 201.7

14,964.7 417.9 14,546.9 20,876.7 3,472.5 17,404.2 7,275.8 7,046.9 228.8

36.0% 1.6% 37.3% 22.8% 40.0% 19.8% -1.6% -2.0% 13.4%

Source: Monthly economy report Mar06 (Ministry of Finance)

Retail loan/GDP 48.0 52.0 52.0 60.0 8.0

State Bank of India

Global Research - India

Global Investment House

Chart 4: Average Income in US$

State Bank of India

Global Research - India