The Way Ahead Looks Bright And Promising

THE WAY AHEAD LOOKS BRIGHT AND PROMISING

STATE BANK OF INDIA

State Bank of India is the first bank established in India and was initially named as Bank of Calcutta. SBI is India's largest commercial bank in terms of assets, deposits, branches and number of customers and employees. 

SBI is among the leading commercial banks which have introduced the use of the latest digital technology. Digitisation is expected to reduce costs and improve productivity at SBI. 

The bank has seen an impressive 13 per cent growth in internet banking over previous year and the share of mobile banking (value of transactions) stands at 44.37 per cent. 

The bank is committed towards transforming into a fully-digitised organisation, supported by technologically advanced back-end operations. 

The Government of India's drive towards demonetisation has given a strong push to the popularity of digital banking. 

We believe that these digital tools and technology can completely transform the distribution reach of SBI's banking services and the banking cycle time in general. The benefits are immense: By digitising information-intensive processes, costs can be reduced significantly and turnaround times can be improved remarkably. These efforts are expected to positively impact the efficiency and productivity of SBI and are essential for being an enduring value creator. In FY2017 the aggregate deposits for SBI registered a multi-year high growth of 18.14 per cent to RS.20,44,751 crore from the previous year level of RS.17,30,722 crore. 

The savings bank accounts saw good growth of around 27.81 per cent following demonetisation. This higher growth of SBI's deposits compared to all scheduled commercial banks' growth has pushed up the market share by 38 bps to 18.05 per cent in March 2017. 

FINANCIAL PERFORMANCE 

In FY2017, the bank's operating profit increased by 17.55 per cent on an annual basis, despite demonetisation and a severe drought in South India. The operating profit crossed the RS.50,000 crore-mark to touch RS.50,848 crore for FY17. However, the bank's net profit growth remained flat at 5.36 per cent Y-o-Y. The bank sourced much of its revenue from its strong performance in non-interest income, profit on sale of investments, forex income and an overall reduction in cost-to-income ratio to 47.75 per cent. The CASA ratio of the bank improved to 45.58 per cent for FY2017, keeping the net interest margin at a healthy level of 2.84 per cent.The bank posted a more sluggish rise in its non-performing assets (NPAs) in FY2017 at RS.1,12,343 crore as compared to the previous year. The gross NPAs as of March 2017 stood at 6.90 per cent, up by 40 bps, while the net NPAs declined by 10 bps to 5.26 per cent on a year-on-year basis. The bank's aggregate deposits witnessed a multi-year high growth of 18.14 per cent to RS.20,44,751 crore as against RS.17,30,722 crore in the previous year. This rise was largely attributed to a rise in savings bank accounts post demonetisation. A large portion of the deposits remained with the bank, despite easing of withdrawal limits. 

Despite adverse conditions in FY17, the bank maintained a healthy capital adequacy ratio and remained well-capitalised to absorb shocks and also keep its growth trajectory intact. The capital adequacy of the bank under Basel III stood at 13.11 per cent in March 2017 and the Tier 1 stood at 10.35 per cent. The bank increased its capital during the year by RS.28,828 crore, while its fresh AT1 capital increased by RS.9,100 crore for the corresponding period. 

CROSS-SELLING: 

State Bank of India is the corporate agent of SBI Life Insurance and SBI General Insurance. The bank has a distribution agreement with SBI Mutual Fund, SBI Cards and Payment Services and SBI Cap Securities for distributing their products.

The bank distributes the mutual fund products of UTI Mutual Fund, Tata Mutual Fund, Franklin Templeton Mutual Fund, L&T Mutual Fund, ICICI Mutual Fund, and HDFC Mutual Fund. The bank's branches are also authorised to open pension accounts under the National Pension System. The bank registered a remarkable 58.80 per cent increase in its cross-selling income to RS.776.61 crore in FY17 on a year-on-year basis. The income from SBI Life registered a 37.79 per cent increase to RS.464.60 crore in FY17. The income from SBI General Insurance increased by 46.46 per cent on a year-on-year basis. In the mutual fund segment, the company recorded a growth of 188.67 per cent in its income at RS.178.72 crore on a yearly basis. Further, the number of Systematic Investment Plan (SIP) accounts grew by 54.16 per cent to 3,70,004 during the corresponding fiscal. 

BANKING ENVIRONMENT 

With growing technological prowess in the financial sector and significant mergers, post-recovery from the global financial crisis, the Asia-Pacific banking giants have largely outperformed the global banking sector. The consolidation of firms in the sector is not only helping the sector fare better, but also enhancing their reach by penetrating furthermore to new regions, both domestically and internationally. In India, the banking sector has constantly been under the limelight through FY17 on account of rising asset quality issue in the first half of the year and demonetisation in the second half. While demonetisation largely disrupted the economy, it resulted in a surge of deposits and advances in the Indian banking system, reviving the savings deposit accounts from a declining trend over the last three years to a growth 11 per cent in deposits in the post-demonetisation period. However, the credit offtake declined to a 63-year low of 5.1 per cent in FY17 on the back of low credit demand from corporates. In the corresponding period, personal loan segment, especially the housing and personal loans segments, witnessed an increase. Banks surpassed the target of `1.80 lakh crore of Mudra Loans for FY17, accounting for about 2 per cent of all scheduled commercial banks' loan portfolio. 

The increase in deposits post-demonetisation hiked the CASA deposits by 4 per cent and the increased liquidity, coupled with low credit growth, led the banks to slash their MCLR rates by about 90 bps in early 2017. Demonetisation also brought the digital channels in the limelight and resulted in a sharp increase in the transactions in all digital modes of payments used by banks. Digital banking grew to about `2,500 billion in 2017, as against `950 billion in April 2016. The digital banking sphere saw a strong presence of SBI. The consolidation of SBI with five of its associate banks and Bharatiya Mahila Bank, provided SBI an entry into the top 50 global banks in terms of balance sheet size. Consolidation in the banking system at large is expected to enable the banks to rationalise their resources and result in significant cost-saving in their operations. 

The banking sector remained at the centre of the government's initiatives. Pradhan Mantri Jan Dhan Yojna (PMJDY) drastically increased the number of accounts and the amount of deposits. The sector also witnessed a decline in the zero balance accounts under PMJDY. The sector also witnessed an addition of a new category of banks - wholesale and long-term finance banks dedicated to lending to infrastructure sector and small, medium and corporate businesses. As a consequence of growing NPAs and higher provisioning, the banks largely saw a declining trend in their net profit as also their return on assets (RoA) and return on equity (RoE) in FY17. The banking sector regulators have extensively introduced measures and policies to cut down the NPAs, one of the major policies being the Insolvency and Bankruptcy code. 

OUTLOOK 

With the pressure points tipping over, the world economy remains in the clutch of a sluggish growth rate, structural unemployment and growing geopolitical turmoil, even in 2017. The inclination towards protectionism is increasing in major world economies such as the US and the EU. The EU has found itself at a crossroad in its tryst with financial stability. All these factors have conjointly brought about a wave of uncertainty around the positive global growth outlook for 2017. The two subversive developments that are expected to take centre stage in the upcoming period are a declining trend in globalisation and a growth in digital flows. While a decline in globalisation is largely looked upon as a loss of opportunity, the localisation of production will sprout good revival and growth prospects for the Indian economy. Despite surmounting challenges of strained exports, rising need for employment generation, growth in farm produce and infrastructure, ambiguity regarding policy reforms and the need for structural changes, the Indian economy is still bustling with hope. However, for India to materialise this hope, the National Policy on Standards must be drafted soon, GST must reach a logical conclusion by the end of the year, the land acquisition disputes must be resorted to achieve ‘Housing for All by 2022'. On the other hand, a persistent growth in the fundamental coupled with low inflation, growth in agricultural produce, decline in power shortages will stimulate the idea of a thriving economy in the near future. Amidst all this, banking sector remains the focal point of economic growth. The consolidation in the sector with merger of associate banks is setting the tone for the future consolidation in the sector to reap the benefits of economies of scale and competitive management practices. The overall environment, along with the monetary and fiscal policies, look conducive for a stable economic growth, equipped with ample liquidity in the economy after demonetisation and growing private investment as a result of consolidations.

CONCLUSION 

Despite the economic deterrents in FY17, State Bank of India posted a strong financial performance for the during the financial year. The bank witnessed a stark increase in its profits and its CASA ratio also improved. The NPAs of the bank witnessed slow growth. The bank posted a multi-year high growth in its deposits and the capital adequacy ratio remained healthy. The bank's cross-selling income reported a remarkable increase. Besides the financial prowess, State Bank of India boasts of a growth conducive environment and effective growth prospects with supportive government initiatives and reforms. Furthermore, leading the banking sector by initiatives such as rate cut and consolidation, SBI remains progressive and ahead of its peers. The way forward for the bank looks bright and promising. We recommend investors to HOLD State Bank of India.