SBI: A balance of performance and valuation

This was made possible by following a strategy of increasing its total assets/equity or financial leverage to the highest at 16x among the banks. The chart in the story has the details. Investors have rewarded the performance. After all, SBI’s market capitalization grew by nearly 55% from FY23-end to Thursday when FY24 results were announced.

While the bank’s net interest margin (NIM) of 3.28% for FY24 is certainly at the lower-end versus other banks, its cost efficiency is also at the bottom with cost-to-income ratio of 56% including wage revision. Rather than comparing multiple ratios, the comprehensive measure of RoA indicates that the bank is at the bottom of the table at 1.04%.

It is pertinent to note that the private sector banks may not want to go for high financial leverage to achieve high RoE despite having superior RoA. A low equity strategy might backfire if there is any sudden rise in non-performing assets (NPA) due to downturn in the local/global economy or for any other reason. The memories of skepticism about private sector banks due to episodes such as the Citibank crisis during the global financial crisis of 2008 are still fresh. Recall, during the time, rumours of liquidity problems at ICICI Bank had led to many clients queuing outside ATMs to withdraw money. Given this, private sector banks would not like to have excessive financial leverage in the form of borrowings or deposits as it is risky.

The question that was posed multiple times during the analyst interaction with the SBI management was how long and how far RoE can be stretched without diluting equity. The management appears confident of avoiding equity dilution and articulated well to convey that cost of equity is much higher than cost of debt as the equity investor expects higher returns than the debt investor. In their opinion, the existing capital adequacy position should be able to support about 20% expansion in loan book from ₹37 trillion as of March 2024. Considering that it has set a target of 13-15% loan growth for FY25, it may be able to avoid equity dilution at least in FY25. Apart from loan growth, the focus would be to sustain NIM at the current level and the correction of bloated cost-to-income ratio would be achieved more through increasing income rather than cutting costs. The management’s outlook on asset quality remains sanguine.

Largest share of total bank deposits

Deposits are the raw material for any bank or lending company, which is where SBI has a competitive advantage. SBI still enjoys the confidence of depositors with the largest share of 23% of total bank deposits in India as of March even in the face of stiff competition from private sector banks. While it is possible to argue that a wide branch network is still helpful in the digital era, the other reason for dominance in deposits is that people still prefer government banks for parking money despite the DCGC fund that guarantees all kinds of deposits of any bank up to ₹5 lakh.

Considering the competitive advantage of deposit mobilization, the valuation of the bank appears reasonable vis-à-vis private sector peers on a price-to-adjusted book value (P/ABV) basis. If one excludes the value per share of SBI’s listed subsidiaries ( ₹160 per share) and other unlisted subsidiaries like SBI AMC and SBI Caps put together ( ₹200 per share) from SBI’s current market price of ₹817.35 apiece, the stock has caught up substantially with its private sector peers at a P/ABV valuation of 1.8 times based on FY24.