The Hindu Business Line : SBI: Invest

Shareholders can subscribe to SBI’s rights offer of one share for every five held, at a price of Rs 1,590 per share. The offer was priced at a 35 per cent discount to the ruling market price when it was announced a couple of weeks ago.

Although markets have been choppy during the past month, the SBI share has shown resilience. The discount to its current price is still attractive and offers a good opportunity to add to your holdings.

The SBI share has been on a roll over the past two years. It has generated returns of nearly 75 per cent over the past year. It has commanded a premium when seen in relation to its peer group of public sector banks.

This offer is expected to raise Rs 16,736 crore to augment long-term capital resources for the bank to make use of the opportunities that a growing economy offers. Other banks have also been raising capital to provide funds for expansion, both domestic and overseas, as well as for meeting Basle-II and other regulatory requirements.

Blessing and burden

The Government of India is the major shareholder and commands a little over 59 per cent of the shareholding. The huge government holding in SBI is both a blessing and a burden. SBI’s importance to the government ensures that it will be relatively insulated from external threats that smaller banks may be vulnerable to.

Yet, it will also be hamstrung by the government’s decision-making process, when it comes to matters of policy, expansion, capital raising and the like.

SBI’s dominant position in the Indian banking scene is well-known. The largest bank in the country in terms of network with nearly 10,000 branches, it commands a significant market share of a little over 15 per cent in business done (both deposits and loans).

If you add the market share of its seven associate banks, that would give the group another 7 per cent of the total market. Its reach spans both top corporate customers as well as the poorest of retail customers — both urban and rural. It has a significant 32 per cent share in forex transactions and over half the government business. In short, it is a proxy for the way the economy is doing.

Making course corrections

Although the bank has lost some ground to nimbler rivals such as ICICI Bank and HDFC Bank, it has begun getting its act together. Its adoption of technology, switch to core banking solutions, ramping up ATM network, entry into retail banking, other newer businesses such as credit cards, insurance are all examples of the bank willing to make the necessary course corrections when it sees the tide changing.

The bank’s capital adequacy position at about 12.28 per cent is comfortably above the regulatory minimum while its asset quality is also stable. With a net NPA level of 1.45 per cent of advances, the bank is relatively comfortable in its financial position.

Merger uncertainty

There is now some uncertainty about whether the seven associate banks (State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra and State Bank of Travancore) will be merged with the parent bank. The current political climate does not permit anything on those lines happening immediately. Consolidation of capacity may be inevitable, although it may take a long while.

It must be mentioned that the usual fears of whether mergers would be a drag because they have often been a bailout of weaker banks in the Indian context, may not be relevant here.

The associate banks have been doing reasonably well (average return on assets at about 0.8 per cent, and net NPAs lesser than 1 per cent while they are comfortably above 12 per cent on capital adequacy).

Risks

The immediate risks that lie ahead are the prospects of a slowdown in the rate of growth in the economy, the possibility of asset quality deterioration, more capital raising for new businesses such as insurance and tightening regulatory requirements (Basle-II), and the threat of increased competition from foreign players in a little over a year from now.

SBI’s track record, its distribution strengths and its adaptability offer confidence that it can handle these issues.

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