The week ending 24 th June brought an unexpected good news from State Bank of India which reported a net profit figure of Rs 2051 crores for the year ending March 31, 2000. This was nearly twice the previous year profit of Rs 1027.80 crores. As a result , the EPS zoomed from 19.5 to Rs 39. Even after adjusting some write backs, the new EPS was around a very pleasing 33. The shares which are presently quoted around Rs 236 are therefore discounted at around 7 and are attractive for investment at the current levels.

During the last five years since 1995, the Bank has increased its Deposits from RS 85,000 crores to Rs 1,78,000 crores. This is the best indicator of growth for any bank. This huge resource base provides the competitive ability for the Bank to get better clients. The vulnerability of a Big Bank however comes from the Non Performing Assets (NPA) which need to be controlled both by reduction of Gross NPAs as well as the growth in new advances. During the last year, SBI has increased its gross domestic credit by 20 % to around Rs 85,000 crores. The Gross NPA was around 14.25 % while the Net NPA s were around 6.41 %. This was an improvement over the previous year figure of 7.18 %. If this trend is maintained, the NPA s can be brought further down. However for a Bank which has a large share of priority sector advances, NPA are inevitable aspects of business and cannot be brought down overnight.

The Bank has on the other hand embarked on adding new economy business to its portfolio. One such business is Credit Cards which is a highly profitable business presently dominated by the Foreign Banks. The Bank is also setting up a new subsidiary for IT operations and this could lead to not only an improvement of efficiency but also a new revenue stream for the Bank . Another business line which can add to the profitability of the Bank indirectly is its imminent entry into Insurance business. With its large infrastructure, it is capable of taking advantage of the emerging opportunities in this area. These developments back the optimistic forecast for the next year from the Chairman.

Amongst the Indian Banks, SBI has always held a pre-eminent position not only for its sheer size of operations but also for its quality manpower. Its shares were therefore hot picks amongst the banking shares until the new generation Banks such as the ICICI Bank and HDFC Bank started stealing the show in the bourses. The accompanying table reflects the relative valuation of some of the leading bank shares based on the financial results of 1999-2000.

It is clear from the accompanying table that the public sector Banks as a category have a low P/E discounting compared to the new generation banks such as HDFC Bank or ICICI Bank. This reflects the perception of the investors on the burden of NPA s and quality of manpower in these banks as well as the presence of unviable branches. While there is a logic to some extent in this argument, investors should consider what is the optimal relative valuation of the Nationalised banks vis-à-vis the leading private sector Bank (in terms of P/E). According to the present stockmarket valuations therefore, 8 SBI shares are valued as equivalent to one HDFC share. Similarly a small and compact bank like Karnataka Bank with EPS of Rs 42 being perceived to have a value of one part in thirty parts of HDFC bank indicates that the market valuation of old generation Banks are not fair.

However, such market imperfections cannot continue for ever. The moment investors realise that the management and staff of a giant like SBI have the ability and desire to lead the industry in size as well as performance, the valuations should chase those of HDFC and ICICI banks. If for example, every customer of SBI decide to place a buy order for one SBI share, the shares can reach the stratosphere. Investors can therefore consider the present price attractive enough to enter the scrip.

Na.Vijayashankar
June 24 2000