STATE BANK OF INDIA AND ITS CURRENT MARKET POSIUTION

Recent awards and recognitions

Best Online Banking Award, Best Customer Initiative Award & Best Risk Management Award (Runner Up) by IBA Banking Technology Awards 2010 The Bank of the year 2009, India (won the second year in a row) by The Banker Magazine Best Bank Large and Most Socially Responsible Bank by the Business Bank Awards 2009 Best Bank 2009 by Business India The Most Trusted Brand 2009 by The Economic Times Most Preferred Bank & Most preferred Home loan provider by CNBC Visionaries of Financial Inclusion By FINO Technology Bank of the Year by IBA Banking Technology Awards SKOCH Award 2010 for Virtual corporation Category for its e-payment solution

SBI: 4 Keys To Investing In The Banking Stock

Read original article at Valuequity.com

State Bank of India (SBI) is Indias largest commercial bank. The group has a network of more than 19,000 branches & offices and over 25,000 ATMs. The bank also has a sizeable global footprint with more than 150 foreign offices, spread across 32 countries. In our view, the following factors hold the key to investing in SBI shares successfully: Key # 4: Sourcing low cost funds A commercial banks business begins with the gathering of funds. The cost of funds varies from one source to another. Banks prefer deposits over other sources of funds due their lower cost. There are two main types of deposits demand deposits and term deposits. Demand deposits are basically current accounts and savings accounts (CASA). Again, demand deposits are cheaper than term deposits. SBI has strong brand equity with generations of Indian savers, who treat it almost at par with the government treasury. However, other banks are now jostling hard for a share of deposits. In fact, in FY09, SBI had a market share in deposits of almost 18%. By FY11, it was down to around 16%. SBIs market share of CASA is about 18%.

SBI: Access to low cost funds Rs crores ('000s) Total deposits CASA FY10 804 347 Source: SBI About 77% of SBIs funds are sourced from deposits. 49% of these deposits are CASA. Due to access to these low cost funds, SBIs cost of deposits was around 5.26% in FY11. Key # 3: Lending more After gathering funds from various sources, a commercial bank must then lend them. SBI has a market share of about 16% of advances (i.e. loans made). The bank made gross advances to the tune of Rs 772,000 crores during FY11, a year on year growth of 20%. As a result of this growth, the credit deposit ratio has improved from 74% in FY10 to 76% in FY11. SBIs earned a yield of 9.56% on its advances during the year. It is important for a lender to have a judicious mix of borrowers. SBI has diverse borrowers ranging from large corporate to mid corporate and SME. Loans are spread across industries like infrastructure, construction, gems & jewelry, engineering, steel, chemicals, petroleum, textile, food processing etc. Key # 2: Lending wisely It is not enough to merely lend more. It is as important to lend wisely. Otherwise a bank will face delayed re-payments or even default. Banks are required to anticipate in advance such delays and defaults. They have to make provisions as well as classify assets as non-performing assets (NPA) and standard assets. SBI had to make substantial provisions during FY11 in respect of special home loans, due to higher regulatory requirements. As special home loans carry lower interest in the initial years, RBI considers these loans riskier and requires banks to provide higher provision of 2% (as against the usual rate of 0.4%). SBI: NPA over the years % Gross Net FY09 2.86 1.79 FY10 3.05 1.72 FY11 3.28 1.63 FY11 934 423 Growth 16% 22%

Source: SBI SBI tries to restructure struggling but standard assets as well as non-performing assets, which still seem viable. It believes this will reduce the exiting level of NPAs as well as arrest new additions. Key # 1: Net interest margins

Given the loan growth of 20% (key#3), interest income increased by 18% in FY11. However, due to low cost CASA deposits growth of 22% (key#4), growth in interest expenses was contained. As a result, interest income increased faster vis--vis interest expense. Consequently, net interest income increased by 37% to Rs 33,000 in FY11. And SBI earned a net interest margin (NIM) of 3.32% in FY11, up from 2.66% in FY10. A commercial bank must earn a spread between the money it borrows and the loans it advances. How cheaply it borrows and how well it lends reflects in the net interest margins. Ultimately that, more than anything else, will drive the performance of the SBI stock.

Innerscore Investment Management Private Limited. All rights reserved.