Sources: www.statebankofindia.com, www.myiris.com
Recommendation: BUY (long term investment)
Sector: Banking
Home Country: India
Listed On: Bombay Stock Exchange & National Stock Exchange, Mumbai
Total Assets FY 2005: Rs. 4,598.83 bn
Net Income FY 2005: Rs. 43.05 bn
Debt/Equity Ratio 2005: 16.3
Market Capitalization: Rs. 505 bn
Share Price as of May 15th, 2006: Rs. 920.00
Expected Earnings per share FY:
2006 : 99.5 Rs.
2007 : 120.0 Rs.
2008 : 144.7 Rs.
Expected Price/Earnings Ratio: (expected EPS to todays share price)
2006: 9.2
2007: 7.7
2008: 6.4
Estimated reasonable P/E ratio 2007: 12
Dividend yield 2005: 2.2%
Target Share Price End 2007: Rs. 1,736.00
(increase of 88.7% compared to actual share price)
Company Profile
The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India in terms of profits, assets, deposits, branches and employees. With a network of over 9,000 branches in India and 51 foreign offices in 32 countries, the Bank commands about one-fifth of the total deposits and loans in all scheduled commercial banks in the country.
Financial Analysis
During FY05, State Bank of India (SBI) posted a Net profit growth of 17% led by robust Growth in Net Interest Income (NII) of 24%. The bank recorded a 28% growth in total advances. On the deposit front the Total Deposits Grew by 15% led by the growth of Term deposits of 14%. Demand deposits grew by 13%. The bank has been focusing on reducing its high cost deposits successfully. Its Loan portfolio has increased by 28% in FY05 compared to a 15% growth in FY04. The bank has a healthy growth in the Deposit Mix with Savings deposits growing at 19%, Demand deposits at 13% and term deposits at 14% in the year ended march 05.
For the 9 month period that ended December 31st, 2005, SBI registered a Net Profit of Rs. 35.5 bn, representing an increase of 9.68% compared to the same period in the prior year. The Net Interest Income went up by 20.88% and the Net Interest Margin improved to 3.5% compared to 3.28% in the prior year. The Net Non Performing Assets (Net NPA) ratio was reduced to 1.67% from 2.56%.
Positive aspects about SBI
· Global reach has been intensified with the opening of offices in Sydney, Shanghai, Moscow, Muscat and Mauritius.
· Non-performing Assets have been contained.
· One focus is to strengthen relationship banking.
· Effective risk management systems are in place for monitoring group and sector exposures qualitatively and quantitatively.
· Transaction costs have been effectively curtailed with the appropriate technology.
· SME is now a strategic business unit.
· Business process reengineering and core banking solutions are in place, which provide online real-time transaction processing.
· Low cost deposits are 41% of total deposits.
· Securitization act will help to recover the NPAs substantially.
Valuation
On the basis of the arguments presented above, SBI should be able to grow its Net Income and EPS by about 20% for the next couple of years, which leads to our EPS estimates until 2008. The P/E ratio of 12, which we deem appropriate for 2007, results from the consideration that financial stocks usually trade at a lower multiple than industrial companies. However, since substantial growth of SBIs EPS over the coming years seems most likely, we estimate 2007 P/E ratio slightly above the market average. With our EPS and P/E ratio estimates we arrive at our share price target of 1,736.00 Rs. Until the end of 2007. As this represents an increase of more than 88% compared to the share price as of May 15th, 2006, we put a BUY recommendation on the stock.