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Suresh Krishnamurthy

STATE Bank of India has unveiled a 48 per cent growth in profits before provision and contingencies boosted by an increase of 81 per cent in profits from sale of Government securities.

Prudent provisions for bad loans however ensured that net profit growth is relatively sedate at about 18 per cent.

Net interest income and core other income have risen by 12 per cent. Operating expenses however spurted by 16 per cent. In this backdrop, without rising contribution from sale of Government securities, growth in profits would not have been achieved.

On the other hand, for SBI, the contribution from Government securities need not be considered as thoroughly unsustainable. SBI may have still booked as profits only a fraction of the gains that has accrued till now due to fall in yields on Government securities between 2001 and now. There is another silver lining. Group profits have surged by 31 per cent. Similar to banks such as ICICI and HDFC, higher contribution from its subsidiaries has started to kick in for SBI too.

So, while the record in terms of profit performance looks good, business growth has lagged. Growth in average advances and deposits has been below that of many of its peers and the average for the scheduled commercial banks.

The comparison is probably not fair considering that SBI is nearly four times the size of its nearest rival. That however is the only benchmark available to judge SBI's performance.

In addition, there are other factors that suggest that performance has slightly deteriorated even adjusted for its size. For instance, retail deposits, which accounted for 60 per cent of total deposits in March 2003, is down to 50 per cent at the end of March 2004. Growing retail deposits is critical to maintain competitive cost of funds. Also, the difference between the average growth for banks and SBI, which was quite small in 2002-03, has widened significantly in 2003-04. The operating expense growth of 16 per cent is also far higher than what its competitors have reported.

From a valuation perspective, the slight deterioration in business growth and expense growth is offset to a large extent by the performance of its subsidiaries.

Besides, the consolidated earnings per share of Rs 105 looks impressive when compared to Friday's closing price of Rs 485.

More Stories on : Financial Performance | Public Sector Banks | Microscope

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