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State Bank of India - A Perpetual Value Trap?

The emergence of State Bank of India

Ranked 236th in the World’s biggest corporations, according to Fortune Global 500 list of the year 2019, SBI is the largest multinational public sector bank, headquartered in Mumbai, India. It is the leading bank in India with an asset share of 23 percent and a combined loan and deposit market share of 25 percent. It is one of the oldest financial institutions in India, origins of which date back to the era of 1806 wherein the formation of the Imperial Bank of India marked the emergence of the State Bank of India. It is considered the oldest commercial bank in India. SBI has designed financial assets aiming to capture both the domestic and international markets. The statutory recognition of SBI was done in the year 1959 when the government passed the State Bank of India act. Eight banks, which belonged to different states, were also a part of SBI subsidiaries. It was at the time of the first five-year plan, which centered on rural India’s growth. To extend its rural scope, the government incorporated these banks into the State Bank of India network. The state bank of Jaipur (est. 1943), the state bank of Bikaner (est.1944), was incorporated in 1963 by SBI. Before this, it was suggested that all related banks should be merged into SBI so that a centralized bank can be set up and operations can be streamlined. Gradually, all the associate banks fused into SBI forming the centralized SBI.

Performance over the years

In due course of time, SBI started to diversify its operations through online platforms and launched YONO for digital banking.

While the SBI performs much better than other PSBs, the largest government bank still had tough times. During 2017-18, the bank lost Rs 6,547 crore. It made a net income of INR 862.23 crore for the financial year 2018-19. The scenario in the financial year 2019-20 looked more optimistic with a projection on a profit of over INR 10,000 crore by December 2019, but the rescue plan for YES Bank was certainly a burden but the overall step was appraised by the finance industry.


The shares of SBI are listed on the Bombay stock exchange as part of the BSE SENSEX index and in the National Stock Exchange of India as part of CNX Nifty. The Global Depository Receipts are listed on London's stock exchange.


The shareholding pattern of State Bank of India

When it comes to the shareholding pattern of the State Bank of India, various stakeholders are involved in the process. According to the valuations as per June 27, 2020, the marginal holding of promoters stands at 57.6%. FII has decreased the holdings by 1.68% and at the same time, the number of shares held by FIIs has fallen to 977. Mutual fund holdings have gradually declined to 13.18%. The number of mutual fund shares fell to 65. Institutional investors have also declined their holdings by 1.45%. The shareholding pattern is quite relevant as maximum shares are issued to promoters who in turn, help in raising money for investment.


Stock Analysis

The above figure represents the scenario of the stock prices of SBI. The value was at INR 112.05 per stock in the financial year 2008. In that period when the global financial crisis occurred, the price of the stocks of SBI fell to INR 88.55 per share. The share price didn’t fall to a great extent though. The reason being that the Indian market was not just as affected as the USA market. The USA market had a preference for spending first, and saving later while the Indian market had the preference to save first and spend later. So, this attitude helped in demining the effect of the global depression.

The stock price then surged to INR 216.82 in the financial year 2010. Then a decline was noticed in the stock prices. The values were INR 216.65, 217.8, and 181.57 per share in the financial years 2012, 2013, and 2014 respectively. With the advent of demonetization and GST, there were constant fluctuations in the share price of SBI because of the slowdown experienced after the financial hazards. In the year 2020, the share price has decreased to INR 186.85 per share as the markets have started experiencing the slowdown due to nationwide lockdown.


Both external and internal externalities affect the stock price of any company. Likewise, besides the financial crisis faced throughout the years, many internal factors also contributed to the fluctuations in the stock prices of SBI. The factors involved, announcements of annual board meetings, preferential issue of shares to the Government of India, internal strikes, lockouts, disturbances, and SBI’s step to exchange assets.

On July 30, the share price of State Bank of India (SBI) was 2% behind its earnings for the June quarter.


It is anticipated that quarter one of Financial Year 2021's profitability would sharply rise as a result of share sales in life insurance, but subsequently, it is also expected that COVID-19 provisions may likely curb growth. However, net interest income soared concurrently by 17 percent to INR 26,642 crore which was 8-12 percent more than the growth predicted by the analysts. On a standalone basis, net gains also increased by 17 percent to INR 4,189 crore.

At INR 187.50, the stock price fell by 3.70% or 1.94% from INR 192 in the previous day. The intra-day level reached as high as INR 193.50 and an intra-day low reached at INR 187.30. With around 3,27,98,245 stocks being traded, SBI stock was one of the active stocks on NSE. Brokerages predict sequentially improved asset quality with smaller drops than Quarter 4 of the Financial Year 2020.


The above table represents the P/E ratio (Price to earnings ratio) of SBI stocks. The minimum value of the P/E ratio of SBI stocks was 6.420, which occurred in the financial year 2020. The maximum value of the P/E ratio was 1116.35, which occurred in the financial year 2017. The average P/E ratio of SBI stock stands at 68.77, which is a healthy value.


Predictions on the functionality of SBI

Although private banks have become cautious in lending, investors fear that SBI, the largest PSB, will expand its share to fuel lending growth in struggling sectors. RBI, in its latest Financial Stability Report, has estimated the gross non-performing assets of borrowers to increase from 8.5% to around 12.5%-14.7% by March 2021, based on the extent of stress in the economy. In most of the negatives in the NPA context, the current price of SBI may rise once the NPAs have settled. The stock is forecasted to cross INR 250-300 when the NPAs fall in the next year.


At the end of March 2020, the aggregate non-performing asset of State Bank of India stood at 6.15% of the overall loan advances, compared with 6.91% at the end of December 2019 and 7.53% at the end of the last quarter of the Financial Year 2018.

The rescue of YES Bank by State Bank of India led lenders, and the merger of six smaller banks added to investor concerns.


Despite the rising NPAs, and uncertainties involved in the financial markets, SBI stocks will still be appealing to invest in, due to the value-added opportunities open to its subsidiaries like SBI Life Insurance.


All hopes high for SBI

It was reported by the Chairman of SBI that 82 percent of the retail customers of the largest bank paid two or more installments during the moratorium period. At the same time, 92% of the customers paid one or two installments during the moratorium period. To ensure the required growth momentum and boost sizes, SBI emphasized strengthening on retail credit.


SBI has also consolidated its treasury activities and has developed a shared technology platform for all subsidiary banks to effectively manage operations. The synergies between its bank subsidiaries have increased due to this reason.


Limitations which needs to be considered

In the given year, SBI stocks have under performed as compared to many private sectors and public sector banks. Across several dimensions, including assets, deposits, and the number of branches, SBI is a dominant player. Although. being the best player among the public sector banks, the loophole which led to its low profitability, which was below the private lenders was the inefficient use of capital. The SBI stocks have never been a revenue generator from the viewpoint of shareholders. On both sides, the volatility is low.


Values which outsmarts the limitations

Despite these limitations, the points which win the confidence of the shareholders on investing in the SBI stocks are important to be discussed. A lot of opportunities are created, which are a result of the value provided by the subsidiaries of SBI. In their respective segments, the subsidiaries of SBI i.e., SBI Mutual Fund, SBI Life Insurance, and SBI Cards have shown impressive performance and increased size and market shares. SBI diluted the stakes in insurance businesses and card businesses to almost around INR 13.800 crore during Financial Years 2017 to 2020.

The subsidiary business of SBI Cards got listed into the stock market in March. It already has a market share of 18.2% on a card base of 1.05 crore customers and a 17.9% share in card spend. This business experienced a compound annual growth rate (CAGR) of 42% in the card spending segment over the Financial Years 2017 to 2020. There was also an increase in revenue which grew at a CAGR of 47%. The financial ratios also appear to be stable with a Return on Equity (RoE) of 27.4% as of Financial Year 2020.

SBI Life Insurance business also is doing well in the markets. It has experienced a growth of 25% in the new business premium category (premium achieved from new policies in a year) against its private competitors which made a growth of 18% throughout the financial years 2015 to 2020. The operating revenue of the SBI life insurance business has been around 20.5% in the financial year 2020 owing to the low-cost structures which indicates a healthy business strategy of SBI.


What’s Next?

When we look around the SBI Asset Management Company, the robust growth and the firm structure of the company comes into the picture. It is India’s largest Asset Management Company and has total assets of INR 3.7 Lakh crore.

In recent years, SBI has increased provisioning coverage ratio (an indication of the provision created out of profits against the bad debts) and has one of the corporate banks' least stressed assets. Increased access to salaried workers also decreased the proportion of moratorium book debts. It would allow the bank to retain management of credit costs, as the effect of Covid-19 becomes evident.

Considering all the factors, the stock price of SBI has been performing at a stable pace. Some areas need the government’s attention like the under performance of the stock in recent times. This has made many people lose confidence in investing the stocks. At the same time, the subsidiaries of SBI are excelling in their respective fields and this adds on to the overall performance of the stock of SBI. The target to meet INR 280 on stocks will only be feasible when all the factors are considered and some good strategies and actions needed are taken to improve the scenario of SBI stocks to boost up the confidence of the institutional investors.


Author: Arushi Mallick


Disclaimer: Note that this post should not be construed as investment advice from Galactic Advisors.

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