14 July 2007

Initiating Coverage
Current price Target price
STATE BANK OF INDIA (STABAN) Rs 1500 Rs 1666
Potential upside Time Frame
Potential upside9-12
11% 13%months
Striking the Right Cord: Unlocking Value PERFORMER
Time frame 12 months
State Bank of India (SBI) is determined to gain meaningful market share by
Kajal Jain
leveraging its size and resources in meeting rising credit demand. It is also
kajal.jain@icicidirect.com
enhancing operating efficiency and boosting fee-based income. We believe the
bank can unlock tremendous value by diluting its stake in its subsidiaries and Chirag J. Shah
also grow its insurance arm aggressively. Consider SBI together with its high- chirag.shah@icicidirect.com
growth businesses, the country’s largest bank is trading at reasonable
valuations. We initiate coverage on the stock with a performer rating.
INVESTMENT RATIONALE
Robust economy presents mega opportunities: India's economy is on the NII & EPS trend
fulcrum of an ever- increasing growth curve with positive indicators such as a
250.00 120.00
stable 8-9% annual growth rate. With a network of over 14,000 branches and
100.00
87% of its business covered under core banking solution, SBI is well poised to 200.00
meet the country’s growing corporate, retail and infrastructure credit demand. 150.00
80.00
60.00
100.00
Improving operating efficiency, boosting fee income: SBI has been continuously 40.00
improving its operating efficiency with the cost-to-average assets ratio declining 50.00 20.00
from 2.46% in FY06 to 2.23% in FY07. It is also raising its thrust on non-interest 0.00 0.00
income, which formed nearly 30% of total income in FY07. 2005 2006 2007 2008E 2009E
NII (Rs bn) EPS (Rs.)
Tremendous value in subsidiaries, insurance arm: SBI Life insurance is one of
the fastest growing private sector players and offers an indirect way to take
exposure in this booming sector. SBI can dilute its stake in subsidiary banks and Stock metrics
earn profits thereby increasing its Tier I capital also. We believe that if SBI dilutes Promoters holding 59.73%
its stake in listed/unlisted subsidiaries, value unlocking will be substantial. Market Cap Rs 81608 crore
52 Week H/L 1760 / 684
Valuations Sensex 14
At the current price of Rs 1500, the stock trades at 1.3x its FY09E adjusted book Average volume 8,000
value (ABV), excluding value in subsidiaries (Rs 605 per share), and 8.5x its
FY09E EPS of Rs 110.3. Factoring in an expected 7% equity dilution in FY08, we
expect the bank to maintain its RoE at around 15%. Historically, the stock has
traded at lower valuations compared to private sector banks mainly on account
of its declining market share and public sector status. However, with the bank Comparative return metrics
becoming more proactive in recapturing market share and concentrating on high-
growth businesses like insurance, we believe on a standalone basis, the stock Stock return 3M 6M 12M
would trade at least 1.5x its FY09E ABV, giving us a fair value of Rs 1062. Adding SBI 58.% 36% 112%
the subsidiaries value of Rs 605 per share (including SBI’s stake in associate PNB 21% 10% 62%
banks and other non-banking subsidiaries), we get a target price of Rs 1666, an Canara Bank 42% 4% 40%
upside of 11% over a 9-12 month time frame. HDFC Bank 17% 15% 51%
Absolute Sell
Exhibit 1: Key Financials 2000
Year to March 31 FY06 FY07 FY08E FY09E
1500 Target Price
Net Profit (Rs. Bn) 44.1 45.4 51.5 62.1
EPS (Rs) 83.7 86.3 91.4 110.3
% Growth 21.9 3.0 6.0 20.7 1000
P/E (x) 17.9 17.4 16.4 13.6 Absolute Buy
Price/Book (x) 3.5 3.0 2.5 2.1 500
Price/Adj. Book (x) 3.2 2.8 2.3 2.0
Gross NPA (%) 3.9 2.9 2.6 2.3 0
Net NPA% 1.9 1.6 1.4 1.1
M a r-05
M a y -05
Ju l-05
S e p-05
N o v -05
Ja n -06
M a r-06
M a y -06
Ju l-06
S e p-06
N o v -06
Ja n -07
M a r-07
M a y -07

RoNA (%) 0.9 0.9 0.8 0.9

Source: Bank, ICICIdirect Research

ICICIdirect | Equity Research
1|Page
Company Background
Promoter & Institutional holding trend
SBI is the largest commercial bank in India. The bank was formed under an Act
70%
that was accordingly passed in parliament in May 1955. Later, the State Bank
60%
of India (Subsidiary banks) Act was passed in 1959, enabling the State Bank of
50%
India to take over eight former state-associated banks as its subsidiaries (later
40%
named associates).
30%

SBI plays a vital role in providing working capital and term finance to the Indian 20%

industry. Due to its large network of branches, SBI has been able to garner a 10%

large chunk of deposits from the rural sector. It has also got the largest 0%
Q1FY07 Q2FY07 Q3FY07 Q4FY07
overseas network. That is the reason as to why the bank has been the largest
Promoter Holding Institutional Holding
banking institution (assets, deposits, branches and employees) in the country.

The bank also has various other interest in the financial services arena i.e.
interest in Life insurance, Capital Markets, Cards and Factoring.

The bank has wide international presence which it runs through its International Banking Subsidiaries State Bank
Banking Group (IBG) that has a network of 70 overseas offices spread over 30 Group
countries covering all time zones and which contributes 7% of total business for Listed:
SBI. The bank has also explored inorganic route in the recent past where it -State Bank of Bikaner &
acquired PT Indomonex bank in Indonesia. Jaipur NonSBI
Banking
CapitalSubsidiaries
Markets
-State bank of
The bank on a standalone basis has a strong branch network of 9517 branches Travancore SBI DFHI
as on March 2007. The Banks assets have grown up to of Rs.500000 crore and -State Bank of Mysore
SBI Life
the total business of the bank crossed Rs.700000 crore. For FY07 the bank Unlisted:
posted a NIM of 3.20% and a ROA of 0.84%. The bank also witnessed a growth -State Bank of Indore
of 3% in PAT to Rs. 4541 crore. On consolidated basis, group’s net profit grew -State Bank of SBI Funds Management
15.1% y-o-y to Rs.6365 crore. Hyderabad
-State Bank of Patiala
SBI Factors

The amendment of the SBI Act by the parliament has thrown a lot of positives -State Bank of
Saurashtra SBI Cards
for the group such as for SBI, the positive factor is that it can reduce its stake in
the subsidiaries and generate profit, which it can then use for its Tier-I capital.
The parent will also not have to provide capital for its subsidiaries. This will give International Banking Group
relief for capital adequacy. The changes will also facilitate SBI to split the
shares of its subsidiaries.

Exhibit 2: Dominant corporate and retail banking franchise

SBI Group Share SBI Group's Share

SBI's Share
Total Business Government
Foreign Exchange
Transactionas

SBI 25%
SBI 35%

SBI 67%

Source: Bank, ICICIdirect Research

2|Page
Investment Rationale

Economic growth presents enormous opportunities

India's economy is on the fulcrum of an ever-increasing growth curve. With its
manufacturing and services sector on a searing growth path, India’s economy
may soon touch the coveted 10% growth mark. The country is poised to see
massive investments in infrastructure (roads, power), real estate (IT offices,
retail malls, SEZs and residential buildings) and significant capacity additions
in manufacturing industries like automobiles, petrochemicals, cement, etc.
According to estimates, a whopping Rs 450,800 crore would be spent on
infrastructure projects during the 10th and 11th five-year plans.

SBI is the leader amongst Indian banks in terms of asset size with the largest Huge Infrastructure,
network of over 14,000 branches. Further, 87% of its business is covered corporate and retail credit
under core banking solutions. The bank is well poised to meet the country’s demand to provide growth
growing corporate, retail and infrastructure credit demand. Its can leverage its impetus.
size to fund huge investments and future merger and acquisition deals too.
The bank has also unveiled plans to raise over Rs 50,000 crore through debt
and equity over the next 3 years to tap the growing credit opportunity in India.

Currently, India’s loan-to-GDP ratio is still low at 41% compared to other

emerging economies. This provides enormous scope for the Indian financial
services sector.

Exhibit 3: Loan to GDP Ratio

Loan-to-GDP Ratio

Hong Kong 145%

Taiwan 121%
China 115%
Malaysia 112%
Singapore 110%
Thailand 76%
Korea 75%
Indonesia 21%
India 41%

0% 20% 40% 60% 80% 100% 120% 140% 160%

Source: ICICIdirect Research

SBI has finally begun leveraging its wide distribution network and size to gain
meaningful market share. The bank's substantial number of branches in rural
areas makes SBI even more competitive to tap the huge business opportunity
of micro financing and rural credit. New initiatives like retail and small loan
factories, technology improvements and progressive branding are all
expected to give the bank the necessary flexibility and agility in an Existing branch network to
increasingly competitive field. give further boost to the
overall business landscape
Its credit growth has been in line with that of the banking sector. After
declining consistently for the last few years, its market share has stabilised at
around 15- 16% during last six months. Advances surged 29% y-o-y to Rs
33,7340 crore in FY07. We expect its loan book to grow at 23.5% in FY08E
and 17% in FY09E to Rs 487,560 crore on the back of its suitable positioning
to reap the benefits of India growth story.

3|Page
Exhibit 4: Credit Growth of SBI vis-à-vis industry
(Rs. In Crs.)

2500000 40%

2000000
30%
1500000
20%
1000000
10%
500000

0 0%
2002 2003 2004 2005 2006 2007

Industry SBI Industry Growth SBI Growth

Source: Bank, ICICIdirect Research

Increasing market share, improving operating efficiency

The management is focused on improving its market share in both deposits

and advances. It has adopted a multi-pronged approach to achieve this
including de-risking its loan portfolio, mobilising resources and boosting fee-
based income.

De-risking its loan portfolio, increased focus on SME and retail sectors

SBI has got a diversified credit portfolio making it less vulnerable to risks
associated with any one sector. However, with its increasing focus on the Market share loss to be
small and medium enterprise (SME) sector and mid-sized companies, the arrested with an upward bias
chances of higher slippages and consequently higher loan loss provisioning
can’t be ruled out. As of March 31, 2007, the share of retail advances to total
advances was 21.5%. Retail sector credit has grown 20% y-o-y and exposure
to housing sector has fallen from 12% to 11% of total portfolio. SBI will
continue its thrust towards SMEs and retail for higher yields leveraging its
large-scale rural presence.

Exhibit 5: Break up of Loan Portfolio

11% 2006-07
Others 11%
11% 2005-06
International 11%
Less Vulnerable
Food 3%
4% to Housing
11% Default
Housing 12%
Agriculture 10%
10%
SME(Others) 8%
7%
10%
SME(Priority Sector) 10%
Mid Corporates 25%
23% Supporting
Top Corporates 11%
12% tommorow's
winners

Source: ICICIdirect Research

4|Page
Mobilising resources to fund balance sheet growth

The bank plans to raise funds amounting to Rs 12,000 -15,000 crore in FY08
through a combination of equity (we assume equity component at around Rs
5,000 crore) and debt. We have factored in equity dilution to the extent of 7%
assuming necessary approvals from Parliament will be received to reduce the
government stake below 59%. The bank will also be raising funds through
Tier II bonds and debt thereby increasing costs. The overall cost of funds is
expected to rise further to 5.4% in FY07 from the current 4.96%. But on an
overall basis, the growth in the cost of funds for SBI has been lower than
most others.

In the past, SBI had surplus liquidity that supported its high credit growth
despite IMD redemptions. This is one of the reasons why SBI lagged the
industry in deposit growth. We believe the advantage of excess SLR is over Huge Funding plans of
and the bank will have to grow core deposits and other debt instruments to Rs. 50000crs. in next three
raise resources. years to fuel growth

Deposits grew at 14.6% y-o-y in FY07, which was lower than the industry
average. The reason was the high base and dip in SBI’s market share. In FY06
also, growth in deposits appeared to be slower at 3.5% on account of
redemption of IMD deposits of Rs 23,014 crore. If we were to exclude the IMD
deposits, growth was 9.8%. With excess SLR lowering to nearly 27% in FY07,
SBI will now onwards need to rely on bonds and debt to fund its balance
sheet growth. We expect deposits to rise 17% and 13.3% in FY08E and FY09E
respectively, but still lower than expected deposits growth in industry of
around 20%.

Exhibit 6: Deposit Growth of SBI Vis-à-vis industry

Redemption of IMD in FY06

leading to lower deposit
3000000 25.0%
growth
2500000 20.0%
2000000
(Rs. in Crs.)

15.0%
1500000
10.0%
1000000
500000 5.0%
0 0.0%
2002 2003 2004 2005 2006 2007

Industry SBI Industry Growth SBI Growth

Exhibit 7: CASA of PSB’s vs. SBI
Source: Bank, ICICIdirect Research
50%

The share of retail deposits is rising which shows SBI has refrained from
raising bulk deposits thereby lowering the cost of funds. Bulk deposits form 40%
nearly 17% of total deposits. SBI is not expected to increase its branch
network aggressively and is expected to leverage the current extensive
30%
network of over 9.000 branches. We expect CASA deposits to remain stable
at current levels of 43-44% for the next couple of years. Considering, the
large balance sheet size of Rs 566,500 crore, CASA level of 43% is also 20%

huge. There is only one PSU bank namely PNB that is above SBI in terms of
higher CASA as on March FY07. Cost of deposits have grown from 4.57% to 10%
4.79% in FY07 and is expected to rise further to 5.03% by FY09E. BOB Canara Bank IOB OBC PNB SBI

2005-06 2006-07
Source: ICICIdirect research

5|Page
Exhibit 8: Trends in CASA & Cost of Deposits

5.5% 44%
44%
43%
5.0%
43%
42%
4.5% 42%
41%
41%
4.0%
40%
40%
3.5% 39%
2005 2006 2007 2008E 2009E

CASA Cost of Deposits (LHS)

Source: Bank, ICICIdirect Research

Margins to remain stable

The yields on average assets are expected to rise on expanding balance sheet
due to recent rate hikes. Further the cost of funds is also increasing. We
expect the bank’s net interest margin (NIM) to stabilise at 3%. Initially, we Scale advantage to give
expect a dip from current 3.2% to 3.04%in FY08E and then expanding pricing power and stabilize
another 4 bps in FY09E. Net interest income (NII) is expected to grow at a margins
CAGR of 14% during FY07-09E to Rs 20,744 crore.

Exhibit 9: NIM’s expected to stabilize

250 3.3%

200 3.2%
3.1%
(Rs. in bn)

150
3.0%
100
2.9%
50 2.8%
- 2.7%
2003 2004 2005 2006 2007 2008E 2009E

NII(Rs.bn) - L.H.S NIM's - R.H.S

Source: Company, ICICIdirect Research

Enhancing fee-based income

The bank’s fee-based income has grown at a CAGR of 13% over FY03-07 and
we expect it to continue growing at a CAGR of 13% over FY07 –09E to Rs
6,134 crore. We believe fee-based income will get a boost as the bank
intensifies cross selling through its extensive branch network. SBI Life also
gives corporate commission on insurance sales to the bank, which generates
fee income too. Earlier about 6,000 branches were used for selling which is Cross selling coupled with
expected to go up to all its branches generating more fee-based income. extensive branch network
SBI, which roughly accounts for one-fifth of the Indian banking industry, is to boost fee income
also planning forays into new businesses such as general insurance and
pension funds, which will give further boost to non interest income. SBI has
the largest international presence among Indian banks. Going forward, we
expect this presence to generate good fee income and garner deposits too.

6|Page
Aggressive marketing and brand re-positioning should help SBI generate
higher fee income. In FY07, fee-based income rose to Rs 4,805 crore from Rs
3,996 crore, registering a 20% y-o-y growth. During the last five years,
overall non-interest income has grown at a CAGR of 7% and we expect it to
grow at a CAGR of 9% over FY07 –09E. Non-interest income accounted for
31% of the bank’s total net income in FY07 and is expected to stay between
30-31% during the next couple of years.

Exhibit 10: Increasing Focus on Core Business

250 20

200
15
150
Rs. bn

Rs. bn
10
100
5
50

- -
2005 2006 2007 2008E 2009E

Net Interest Income Non Interest Income Trading Gains

Source: Bank, ICICIdirect Research

Going forward, we expect income from trading to decline. Treasury losses

are believed to be tapped as any major rise in yields is not expected due to
stable inflation and steady demand and supply of government securities (G-
Secs). With new accounting policy for netting of amortization in investments
from other income rather than including in provisions, reported other income
looks subdued. However, we have continued with old system in order to
show true picture of increasing non-interest income.

Greater operating efficiency

SBI’s cost-to-income ratio is showing an improvement on account of stable
employee expenses. Its cost-to-income ratio has fallen from 50.9% in FY06
to 50.3% in FY07 and is expected to go below 48% by FY09E. SBI is losing
about 7,000 – 8,000 employees every year, which means over 35,000
employees in the next five years, whereas addition is very minimal.
Employee expenses are estimated to show a nominal rise of 3 - 4% annually
over the next 3-4 years. SBI’s operating expenses to average assets ratio has Conscious efforts in reducing
fallen from 2.46% to 2.23% y-o-y and with increasing efforts to improve
the number of employees to
operational efficiency we believe it to fall below 2% by FY09E. We have
bring down operating
assumed 8% CAGR over FY07-09E in overall operating expenses.
expenses
Exhibit 11: Improving operating efficiency

0.8 0.035
0.03
0.6 0.025
0.02
0.4
0.015
0.2 0.01
0.005
0 0
2001 2002 2003 2004 2005 2006 2007 2008E 2009E

Operating expenses/ Total net income % Operating expenses/ Avg. assets %

Source: Bank, ICICIdirect Research

7|Page
Healthy asset quality
Gross and net NPAs as a percentage of advances have fallen to 2.92% and
1.56% respectively as of March 31, 2007 from 3.61% and 1.88% as of March
31, 2006. SBI is the largest bank and has largest asset book. We have
factored in an increase in slippages in future estimates as fresh NPAs are
expected under the rising interest rate scenario. We estimate gross NPAs at
2.33% in FY09E. The bank’s loan loss provision ratio is currently 46.3% and
is projected to go up to 52% by FY09 thereby bringing net NPA levels to
1.11% by FY09E.

Exhibit 12: Declining NPA’s and rising loan loss coverage ratio

6.5% 0.61

5.5% 0.51

4.5% 0.41

(Rs.in bn)
3.5% 0.31

2.5% 0.21

1.5% 0.11

0.5% 0.01
2005 2006 2007 2008E 2009E

Gross NPA(%) Net NPA(%)

Slippages(R.H.S) Loan loss coverage ratio
Source: Bank, ICICIdirect Research

Equity dilution in H2FY08 to shore up Tier I CAR

The bank's capital adequacy ratio (CAR) at the end of March 31, 2007 was
Follow on Public Offering of Rs.
12.34% with Tier I CAR at 8.01%. During H2FY08, the bank intends to
5000 crore likely in H2FY08
undertake a further equity dilution, which we have assumed at 7%, in order
to bolster its Tier I CAR. The fresh infusion of capital should help the bank
grow its balance sheet size at a CAGR of 15% over FY07-09E to Rs 116,789.3
crore. Total assets have grown at a CAGR of 11% during last 5 years.

Exhibit 13: Maintenance of adequate CAR

14%
12%
10%
8%
6%
4%
2%
0%
2005 2006 2007 2008E 2009E

Tier I Tier II CAR

Source: Bank, ICICIdirect Research

8|Page
 Tremendous value in subsidiaries, insurance arm
Banking subsidiaries – opportunity for unlocking value
SBI’s seven associate banks had a market share of 7.52% in deposits and
7.56% in advances as at end FY07. We value the banking subsidiaries at Rs
269 per share of SBI based on FY09 estimates. We have valued its listed
subsidiaries at current market cap, whereas unlisted subsidiaries are valued
at 1x FY09E networth.

The Lok Sabha gave its nod to SBI to reduce its equity stake in its seven
subsidiary banks to 51%. The SBI (Subsidiary Banks) Act, 1959 amendment
bill intended to bring SBI subsidiaries on par with other national banks and
help them raise capital for meeting CAR norms under Basel II requirements.
SBI can dilute its stake in Subsidiary banks and earn profits thereby
increasing its Tier I capital also. We believe in case SBI decides to dilute the
stake in listed/unlisted subsidiaries, huge value will be unlocked for SBI.

b Exhibit 14: Details of banking subsidiaries

SBI's Opex / Avg ROA ROE NIM's Business Branches CAR Value per
Stake Assets Total Tier I share of SBI
State Bank of Bikaner & Jaipur 75% 1.92% 0.9% 20.0% 3.4% 49246 844 12.9% 7.8% 29
State Bank of Travancore 75% 1.48% 0.9% 22.3% 3.2% 56058 704 11.7% 7.6% 28
State Bank of Mysore 92% 1.69% 1.1% 24.0% 3.1% 38784 642 11.5% 6.6% 40
State Bank of Indore 98% 1.29% 0.9% 17.3% 2.6% 35458 443 11.8% 6.7% 26
State Bank of Hyderabad 100% 1.41% 1.1% 21.7% 3.0% 71227 949 12.5% 8.3% 67
State Bank of Patiala 100% 1.19% 0.8% 15.5% 2.5% 68233 763 12.4% 8.4% 57
State Bank of Saurashtra 100% 1.95% 0.6% 10.5% 3.0% 22284 431 11.8% 8.7% 21
FY09ETotal 269
Source: ICICIdirect Research

New Holding company via NBFC route on the anvil

The bank’s management has articulated its intention of forming a holding
company (NBFC) and placing SBI Life and SBI AMC subsidiaries. It also plans
to divest 10% of the holding company to strategic investors. This will help
the bank in two ways. First, it will enable the fair valuation of the AMC
business and the life insurance venture (as was clearly visible from the
creation of ICICI holding co. where the company was valued at half the
market capitalization of the parent). Secondly, it will reduce the burden of
infusing fresh capital to fuel the growth of the life insurance venture. The
capital required by the insurance arm for the current fiscal is estimated at Rs
500-600 crore. The plans are at a conceptualization stage and will take time
to materialise.
Exhibit15: Non-banking subsidiaries and joint ventures

Value Per
Non Banking Subsidiaries SBI's Stake PAT 2007 Share Associate Partner
SBI Caps 86% N.A. 25
SBI DFHI 67% 53.3 12 ADB (4.69%) & other banks (22.46%)
SBI Funds 63% 29.8 18 Societe Generale
SBI Factors 70% 13.1 1 SIDBI (20%) & Union Bank of India (10%)
SBI Cards & Payments Services Pvt.
Ltd. 60% 91.2 3 GE Capital
SBI Life Insurance Company Ltd. 74% 3.8 265 Cardiff
Stake in UTI AMC 25% N.A 12
FY09E – Total Rs. 336
Source: ICICIdirect Research

9|Page
SBI is also trying to harness the big opportunity in the pension funds
management business, which it will operate through a subsidiary. The
pension funds business looks attractive, as all banks cannot enter this
segment because of the high entry barriers, which the RBI has prescribed
recently. The possibility of merging all the associate banks together seems to
be a difficult proposition.

SBI Life Insurance

In India, life insurance premium penetration is still very low at 2.5% of GDP
whereas it is much higher in other countries. In FY07, SBI Life was one of the
fastest growing private sector life insurance companies after Reliance Life.
SBI Life’s gross written premium stands at Rs 2,928 crore and grew 172% y-
o-y in FY07 and 123% in FY06. APE (Annualized premium equivalent) overall
business grew from Rs.494 crore to Rs.1804 crore. APE has grown at extra- Low penetration of insurance
ordinary 264% in FY07 to Rs.1804 crore. We expect the APE to grow atleast and vast distribution network
121% in FY08E and 69% in FY09E to Rs.3984 crore and Rs. 6718 crore will help SBI spearhead the
respectively. Valuing the company at 20% NBAP margin and 15 times its life Insurance boom
NBAP, we get the valuation at Rs. 14,913 crore (USD 5bn) for FY09E. This
places the value at Rs.265 per share of SBI.

Exhibit 16: Valuation of SBI Life Insurance

FY2009E FY2008E FY2007

GWP 7972 5012 2928
Growth 59 71 172
APE -new business 6718 3984 1804
% Growth 69 121 264
NBAP Margin
20% 1344 797 361
Valuation multiple
15% 20153 11951 5413
SBI's share - 0
74% 14913 8844 4006
Value per share of SBI 265 157 76
Source: ICICIdirect Research

Recently, Mr. O. P. Bhatt has stated that SBI Life Insurance is valued at
Rs.28600 crore ($7bn) which converts SBI Life to a value of Rs. 375 per
share. However, we have taken a conservative valuation based on FY09E
which gives us SBI Life’s value at $5bn.

Exhibit 17: Life Insurance premium to GDP (%)

Singapore 6.0%

Korea 7.3%

India 2.5% Bound to Increase:

Youngest Population in the
Malaysia 3.6% world

UK 8.9%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

Source: ICICIdirect Research

10 | P a g e
SBI Life’s market share in private sector life insurance has risen from 8.1% in
FY06 to 13.2% in FY07 depicting its high growth strategy. We expect SBI Life
to continue gaining market share due to the reach it has got through the
extensive branch network of over 14,500 branches of SBI and its
subsidiaries.
SBI Life is the only profit
SBI Life enjoys the distinction of being only private player in the industry to
making company in the Indian
have posted profits in two consecutive years. It posted a profit of Rs 3.83
private life insurance space
crore and the total asset under management was Rs 4,741 crore as of March
31, 2007. It is also planning to make foray into the general insurance
business.

Exhibit 18: Rising market share of SBI

30
26 27
26
25
22

20

15 13
10
10 8 8
7
5 5 4 5 4 4 4 3
5
5 3 3 2 2

0
l
rd

ua
l

if e

rk

a
nz

fe
ia

G
ife

sy
da

iv
Yo
AI

Li
nt
llia

ut
nl
IL

Av

Vy
an
de

M
Su

e
ta

ew
jA

SB

nc
St
ru

Ta

G
d
rla
ja

lia
N

IN
Ol
IP

FC
Ba

Bi

Re
ax

a
IC

HD

dr
M
IC

in
ah
M

FY06 FY07
k
ta
Ko

Source: IRDA, ICICIdirect Research

SBI AMC

SBI AMC is making good profits since last couple of years. Funds under
AUM grew at 28% in FY07 to Rs 16,873 crore. However, the industry grew
over 41% during the same period. We have assumed SBI AMC to grow at
40% in FY08 and another 30% in FY09E whereas the industry is expected to
grow at a faster rate. In India, mutual fund industry has yet got a long way to
go as compared to its peer emerging economies and other developed
countries before growth line tapers down. Net profit surged 60% in FY07 y-
o-y to Rs 29.8 crore from Rs 18.6 crore.

Exhibit 19: Mutual Fund's AUM's as % of GDP

USA 74%

Korea 25%

Mammoth SBI MF to benefit

India 8%
opportunity from the low
base.
Brazil 45%

UK 31%

0% 10% 20% 30% 40% 50% 60% 70% 80%

AUM as % of GDP

Source: ICICIdirect Research

11 | P a g e
We believe SBI MF will nearly double its AUM by FY09E to Rs 30,709 crore. SBI AMC commands 7th
SBI AMC was ranked at 7th position in terms of AUM as at end FY07. We position in terms of
have valued SBI AMC at 5% its FY09E AUM, leading to its valuation at Rs 998 industry AUM
crore considering SBI’s 65% stake. It thereby assigns a value of Rs.18 per
share of SBI.

Exhibit20: SBI AMC’s AUM as compared to industry

450000 1.2
400000
1
350000
300000 0.8
250000
0.6
200000
150000 0.4
100000 0
0.2
50000
0 0
2002-03 2003-04 2004-05 2005-06 2006-07

AUM's Industry AUM's SBI Funds

AUM's Growth SBI (Y-o-Y) AUM's Growth All (Y-o-Y)

Source: AMFI, ICICIdirect Research

RISKS & CONCERNS

Sharp increase in interest rate concerns

We believe the rise in interest rates could become a key risk factor, which
may affect the bank’s stability in NIMs going forward.

Pension liability to wipe of one year’s profit from reserves

The expected pension liability to be provided for on account of revision in

AS – 15 on retirement benefits may bring a dip in reserves to the extent of as
high as Rs 4,500 crore (if adjusted one time) and reduce its book value by
Rs.80 per share. However, SBI and other banks may not exercise this option
as this will lead to one time drastic fall in capital adequacy. Hence, as per the
latest proposal to adjust the pension liability over 5 years, the banks
profitability will be impacted by Rs 800-900 crore per annum. We have made
a provision of the same in our estimates.

Any negative macro economic factors to affect SBI

Any downturn in economy will have a direct impact on SBI and its asset
quality being the largest bank in the country.

Loss in market share due to rising competition also remains a concern area
for the bank

12 | P a g e
FINANCIALS

Net profit for FY07 grew by 3% y-o-y to Rs 4,541 crore. We expect net profit
to grow at a CAGR of 17% over FY07-09E to Rs 6,214 crore and NII at a
CAGR of 13% to Rs 20,677 crore. Core fee income grew 20% y-o-y to Rs.
4805 crores giving positive trend on the core income front. Non-interest
income will continue to be one of key contributors in overall profitability with
its share accounting for 31% of total net income in FY07.
Currently, 75% of investment book is in HTM category with balance in AFS
category with duration of less than 2 years. We therefore believe future MTM
provisions to be under control. With net NPA’s also gradually sliding down,
we believe overall provisions remain between 0.7% to 0.8% of average
assets.
With 15% CAGR growth expected in huge assets base to Rs 7529 bn, we see
RoA remaining stable at 0.8 –0.9% during the next couple of years. Also,
with issue of fresh capital expected in FY08, leverage is falling to below 18x
going forward, putting pressure on RoE to remain at 15% levels.

Exhibit 21: ROE Decomposition

FY06 FY07 FY08E FY09E
Net interest income/ Avg. assets 3.3% 3.0% 2.9% 2.9%
Non-interest income/ Avg.
assets 1.6% 1.4% 1.3% 1.3%
Net total income/ Avg. assets 4.8% 4.4% 4.2% 4.2%
Operating expenses/ Avg.
assets 2.5% 2.2% 2.0% 1.9%
Operating profit/ Avg. assets 2.4% 2.2% 2.2% 2.3%
Provisions/ Avg. assets 0.9% 0.8% 0.8% 0.8%
Return on Avg. assets 0.9% 0.9% 0.8% 0.9%
Leverage (Avg assets/ Avg
equity) 18.4 18.0 17.2 16.5
Return on equity 17.0% 15.4% 14.4% 14.5%
Source: ICICIdirect Research

NIMs rose to 3.20% supported by advances growth of 29% and growth in

deposits by a good 15% y-o-y. NIM’s are stabilising at 3 – 3.1% with yield on
average assets growing from 7.88% in FY07 to 8.17% in FY09E and cost of
funds rising 4.96% to 5.4% during the same period.

Exhibit 22: Return Ratios being maintained

1.1% 25%

1.0%
20%
1.0%
15%
0.9%
10%
0.9%

5%
0.8%

0.8% 0%
2004 2005 2006 2007 2008E 2009E

Return on net worth %

Return on avg. assets %

Source: ICICIdirect Research

13 | P a g e
Valuation
At the current price of Rs 1500, the stock trades at 1.3x its FY09E adjusted
book value (ABV) excluding value in subsidiaries (Rs. 605 per share) and 8.5x
its FY09E EPS of Rs 110.3. The above valuation makes the country’s largest
bank available at good valuations. After factoring in an expected 7% equity
dilution in FY08, we expect the bank to maintain its RoE at 15% levels. There
still exists a huge gap between public and private sector valuations, which
we expect to, decline gradually, particularly in case of larger PSU banks. SBI
has got new top level management this year, which will be there for five
years. This is another positive for the bank.
Exhibit 23: M/cap to total assets India’s largest bank available
at reasonable valuations
600000 0.35

500000 0.3

0.25
400000
(Rs. in Crs)

0.2
300000
0.15
200000
0.1

100000 0.05

0 0
HDFC Bank ICICI Bank PNB OBC SBI

Assets -L.H.S M-CAP/Assets - R.H.S

Source: BSE, ICICIdirect Research

Historically, SBI traded at lower valuations compared to peer private sector

banks mainly on account of losing market and its public sector status.
However, with SBI becoming more intense towards recapturing its market
share and concentrating on other high growth businesses, we believe on
standalone basis SBI to trade at least 1.5x its FY09E ABV giving us a fair
value of Rs.1062. We add a subsidiary value of Rs. 605 per share (including
SBI’s associate banks and other non banking subsidiaries) as per exhibit
giving us a target price of Rs.1666, an upside of 10% over a 9-12 month time
frame. We rate the stock a performer.
Exhibit 24: Peer group valuation
2009E Focus on recapturing the lost
Peer group comparison P/E P/ABV market share and concentrating
on new business prospects to
UTI Bank 17.5 3.1
justify the bank to trade at higher
Canara Bank 5.9 1.1 P/ABV of 1.5x on FY09E
PNB 7.2 1.2
SBI 13.7 2.1
SBI core banking (Standalone excl subs val) 8.6 1.3
Global peers
Bank of China 12.1 1.9
ICBC 13.8 2.3
Bank of East Asia 13.0 2.1
Source: Bloomberg estimates, Consensus Estimates, ICICIdirect Research

SBI, having the largest asset base in Indian economy is available at cheaper
valuations compared to its global peers even after a rally in the stock in last
one month.

14 | P a g e
As depicted by P/ABV band, SBI is trading at 2.5x its FY07 ABV and 1.75x its
FY09E ABV on standalone basis. As and when the PSU banks start getting
re-rated, SBI being the leader should be the first beneficiary and below is the
sensitivity analysis table. In case of Standalone bank being valued at 1.7x its
FY09E ABV we get an overall target price of Rs.1790. But based on PSU
banks valuation we have valued SBI at 1.5x its FY09E ABV giving us an
overall target price of Rs.1666.

Exhibit 25: Sensitivity Analysis if P/ABV multiple increases for core

business

ABV
FY08E FY09E

Multiple 610.7 708.2

1.4 854.98 991.48

1.5 916.05 1062.3

1.6 977.12 1133.12

1.7 1038.19 1207.34

Source: ICICIdirect Research

Exhibit 26: P/ABV Band -Valuation

1600

1400
2.5x
1200
2x
1000
1.5x
800

600
0.5x

400

200

0
200 3 200 4 200 5 200 6 200 7
5/1 6/ 5/1 6/ 5/1 6/ 5/1 6/ 5/1 6/

Source: ICICIdirect Research

15 | P a g e
 Profit and Loss Account
Rs. Bn
FY2009E FY2008E FY2007 FY2006
Interest Earned 550.5 465.7 394.9 359.8
Interest Expended 343.1 288.5 234.4 203.9
Net Interest Income 207.4 177.2 160.5 155.9
% growth 17% 10% 3%
Non Interest Income 88.4 81.0 74.5 74.4
Fees and advisory 61.3 53.8 48.0 40.0
Trading Income and sale of Invt. 4.1 4.5 5.7 5.9
Other income 23.0 22.6 20.7 28.5
Net Income 295.9 258.2 235.0 230.2
Employee cost 86.2 80.7 79.3 81.2
Other operating Exp. 50.4 44.1 38.9 36.0
Operating Income 159.2 133.4 116.8 113.0
Provisions 59.0 50.3 40.5 43.9
PBT 100.2 83.1 76.2 69.1
Taxes 38.1 31.6 30.8 25.0
Net Profit 62.1 51.5 45.4 44.1
% growth 21% 13% 3%

Balance Sheet
Rs. Bn
FY2009E FY2008E FY2007 FY2006
Liabilities
Capital 5.6 5.6 5.3 5.3
Reserves and Surplus 447.5 396.4 307.7 271.2
Networth 453.2 402.0 313.0 276.4
Deposits 5770.2 5093.5 4355.2 3800.5
Borrowings 520.8 424.9 397.0 306.4
Subordinated Debt 288.2 221.7 161.7 49.9
Other Liabilities & Provisions 499.8 463.1 438.7 505.5
Total 7532.2 6605.2 5665.6 4938.7

Assets
Fixed Assets 29.2 29.6 28.2 27.5
Investments 1754.8 1587.2 1491.5 1625.3
Advances 4875.6 4167.8 3373.4 2616.4
Other Assets 271.0 264.9 252.9 223.8
Cash with RBI & call money 601.7 555.9 519.7 445.6
Total 7532.2 6605.2 5665.6 4938.7

16 | P a g e
Ratios
FY2009E FY2008E FY2007 FY2006
Valuation
No. of Equity Shares (Rs. Bn) 56.3 56.3 52.6 52.6
EPS (Rs.) 110.3 91.4 86.3 83.7
BV (Rs.) 804.5 713.7 594.7 525.3
BV-ADJ (Rs.) 708.2 610.2 494.9 432.0
P/E 13.6 16.4 17.4 17.9
P/BV 10.4 13.6 16.4 17.4
P/adj.BV 1.6 2.1 2.5 3.0
Div. Yield (%) 1.1% 1.0% 0.9% 0.9%
DPS (Rs.) 24.0 17.0 15.0 14.0

Yields & Margins

Yield on average interest earning assets 8.2% 8.0% 7.9% 8.0%

Avg. cost on funds 5.4% 5.2% 5.0% 4.9%
Net Interest Margins 3.1% 3.0% 3.2% 2.9%
Avg. Cost of Deposits 5.03 4.90 4.79 4.57
Yield on average advances 9.1% 8.9% 8.3% 7.6%

Profitabilty
Interest expense / total avg. assets 4.9% 4.7% 4.4% 4.3%
Interest income/ total avg. assets 7.8% 7.6% 7.4% 7.5%
Non-interest income/ avg. assets 1.3% 1.3% 1.4% 1.6%
Non-interest income/ Net income 29.9% 31.4% 31.7% 32.3%
Net-interest income/ Net income 32.5% 32.4% 34.2% 35.9%
Cost / Total net income 46.2% 48.3% 50.3% 50.9%

Quality and Efficiency

Credit/Deposit ratio 84.5% 81.8% 77.5% 68.8%
GNPA% 2.3% 2.6% 2.9% 3.9%
NNPA% 1.1% 1.4% 1.6% 1.9%
RONW (%) 14.5% 14.4% 15.4% 17.0%
ROA (%) 0.9% 0.8% 0.9% 0.9%

17 | P a g e
 Key assumption growth ratios
FY2009E FY2008E FY2007 FY2006

Advances 17% 24% 29% 29%

Deposits 13% 17% 15% 4%
Borrowings 23% 7% 30% 60%
Operating expenses 9% 6% 1% 16%
Fee income 14% 12% 20% 13%
Trading gains -10% -20% -3% -67%
Staff cost 7% 2% -2% 18%
Effective tax rate 38% 38% 40% 36%

Other assumptions
Yield on average advances 9.1% 8.9% 8.3% 7.6%
Cost of deposits
Current 0.0% 0.0% 0.0% 0.0%
Term 7.6% 7.4% 7.3% 7.3%
Savings 3.5% 3.5% 3.5% 3.5%

18 | P a g e
Annexure on other non banking subsidiaries

SBI DFHI, a primary dealer (PD), undertakes trading in government and non-government
securities, in the debt market. For the period ended March 2007, the company had earned a
PAT of Rs.53.25 crore. The company also diversified into profitable Non-SLR avenues
resulting in better profitability.

SBI holds 67.01% of their share capital while other nationalized banks hold 22.46%. All India
Financial Institutions and Private Sector banks hold 5.84% and the Asian Development Bank
holds 4.69% as on March 2007.

SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)

SBI cards are in the 2nd position in the country under market share. The entity is a joint
venture between GE and SBI. During the year 2006-07, the company issued 14.81 lakh
additional cards and the total tally has gone upto 33.57 lacs. The company generated
revenues of Rs.896.50 crore and PAT of Rs 58.77 crore an exuberant growth of 62% y- o- y.
The bank has plans of reaching number one position in next 2 – 3 years.

SBI Capital Markets Ltd (SBICAP)

In 2006-07 the subsidiary substantially enhanced the scale of operations in the Project
Advisory & Structured finance and Mergers and Acquisitions .It was ranked as no. 1 lead
arranger in the Asia Pacific Region for the second consecutive year by both project finance
international and Bloomberg. FY07 gross income stood at Rs.193.39 crore with number of
branches rising to 34.

SBI Factors and Commercial Services Pvt Ltd (SBI FACTORS)

SBI Factors, a subsidiary of State bank of India (SBI) is one of the leading factoring
companies in India. On the performance side, the asset level of the company increased by
33% i.e. from Rs. 919.36 crs to Rs.1225.18 crs in FY07.The number of clients also saw a
rise of 48% which currently stands at 1106.The Company also witnessed 56% growth in
total income and ended the year with a PAT of Rs. Rs.13.1 crs as against Rs. 10.67 in the
last fiscal.

19 | P a g e
RATING RATIONALE

ICICIDirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its
stocks according to their notional target price vs current market price and then categorises them as
Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and
the notional target price is defined as the analysts' valuation for a stock.

Outperformer: 20% or more;

Performer: Between 10% and 20%;
Hold: +10% return;
Underperformer: -10% or more.

Harendra Kumar Head - Research & Advisory harendra.kumar@icicidirect.com

ICICIdirect Research Desk,

ICICI Securities Limited,
2nd Floor, Stanrose House,
Appasaheb Marathe Marg,
Prabhadevi, Mumbai – 400 025

research@icicidirect.com

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20 | P a g e