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State Bank of India.

BSE: 500112 Sector: Financials
NSE: SBIN ISIN Code: INE062A01020
BSE LIVE 15:55 | 18 Aug 278.65 -2.10
(-0.75%)
OPEN

278.00

HIGH

279.50

LOW

276.00

NSE 15:59 | 18 Aug 278.70 -2.15
(-0.77%)
OPEN

278.00

HIGH

279.65

LOW

276.00

OPEN 278.00
PREVIOUS CLOSE 280.75
VOLUME 993368
52-Week high 315.00
52-Week low 231.00
P/E 29.27
Mkt Cap.(Rs cr) 240,533
Buy Price 278.65
Buy Qty 297.00
Sell Price 0.00
Sell Qty 0.00
OPEN 278.00
CLOSE 280.75
VOLUME 993368
52-Week high 315.00
52-Week low 231.00
P/E 29.27
Mkt Cap.(Rs cr) 240,533
Buy Price 278.65
Buy Qty 297.00
Sell Price 0.00
Sell Qty 0.00

State Bank of India. (SBIN) - Director Report

Company director report

I. ECONOMIC BACKDROP AND BANKING ENVIRONMENT

GLOBAL ECONOMIC SCENARIO

Global growth remained stagnant at 3.1%. On the global level while the advancedeconomies' performance eased modestly in 2016 when compared to 2015 the emerging marketand developing economies performed somewhat better. The US experienced a lower GDP growthsince 2011 thereby acting as a drag on the overall advanced economies' growth. UK sloweddown against the backdrop of weaker net exports. Euro Area as a whole however registereda tad higher growth in 2016 when compared to 2015. Meanwhile higher capital expenditureenabled Russia to come out of recession in Q4 2016 thereby pulling up overall growth ofemerging and developing countries (4.1% in 2016).

Despite some headwinds global economy has been recovering in 2017 with performanceimproving specifically amongst the advanced countries. Moreover economic performance ofEuro area is also showing an uptick with various indicators including unemployment rateand factory output refiecting the improving dynamics this year. Activity in Japan has alsosurprised on the upside with pick-up in industrial output and exports. Though the US GDPgrowth eased in Q1 2017 the good thing is that a possible fiscal stimulus is expected toprovide a push to economic growth.

Among the emerging and developing world China continues to grow moderately withpersistent support from the authorities. However recently Moody's Investor's Servicedowngraded China to A1 from Aa3 and changed its outlook to stable from negative. Therating agency attributed this decision to expectations that China's economy-wide leveragewould increase further over the coming years planned reform program would likely slowdown but not prevent the rise in leverage and sustained policy stimulus would causerising debt across the economy.

Economic activity in India is expected to recover past the slowdown due todemonetisation.

The global trade slowed down to 2.2% in 2016 owing to sluggish investment and inventoryadjustment. However it is likely to benefit from expected increase in global demandalbeit increasing protectionist policies remain a matter of concern. The overall world GDPis expected to grow by 3.5% in 2017. However deepening geo-political tensions in theMiddle East and North Africa region faster than expected Fed rate hike and increase inprotectionism policies by the advanced economies are the key risks that can put downwardpressure on global economic activity.

Another aspect that infiuences global growth is crude oil price which has plummeted inrecent weeks to go below $50 per barrel. The sharp fall is driven by the market's deeperworry that OPEC's steps of a production cut may worsen structural imbalances. OPEC andother major producers had been enjoying higher prices since agreeing in November to slashproduction a strategy designed to rid global markets of excess supply. Going forward itis expected that dynamics of crude oil price will be driven by decision of Saudi Arabiaand other OPEC members to implement production cut for at least 12-18 months to reduce theinventory glut.

INDIA'S ECONOMIC SCENARIO

After witnessing demonetisation in FY2017 the Indian economy is going to see anothermajor reform in the form of implementation of GST in FY2018. India's GVA growth which isexpected to expand by 6.7% in FY2017 is set to increase in the range of 7.4% in FY2018(RBI estimates) due to accelerated pace of remonetisation stepping up of capitalexpenditure boosting of the rural economy demand for afiordable housing a normalmonsoon and roll-out of GST by July 2017.

Indian Meteorological Department (IMD) has forecasted that this year monsoon would be"Normal" or around 96% of Long Period Average (LPA) with an error of 5% andwith a fair distribution of rainfall across major parts of country. If the forecast holdsit will boost rural demand and also alleviate rural distress.

As a result of very good rainfall during monsoon 2016 and various policy initiativestaken by the Government the country has witnessed record foodgrain production in FY2017.As per Third Advance Estimates for FY2017 total foodgrain production in the country isestimated at 273.38 million tonnes which is higher by 8.34 million tonnes than theprevious record foodgrain production of 265.04 million tonnes achieved during FY2014 andsignificantly higher by 21.81 million tonnes than the last year's foodgrain production.

Both Wholesale Price Index (WPI) and Consumer Price Index (CPI) infiation have remainedunder control throughout FY2017. CPI infiation declined significantly from a high of 9.9%in FY2013 to 4.5% in FY2017. The infiation trajectory will remain in the range of 4-5% forthe next 2 years with the possibility of a downward bias thanks to Governmentinitiatives adoption of infiation targeting framework by RBI and constitution of MPC.

Based on new base year (2011-12) Index of Industrial Production (IIP) grew by 5.0% inFY2017 compared to 3.4% in FY2016 hence defying the negative impact of demonetisation.The manufacturing sector which has been the most volatile grew by 4.9% in FY2017 asagainst 3.0% growth in FY2016. Mining and Electricity grew by 5.3% and 5.8% respectivelyin FY2017.

The year-wise number of investment proposals (greenfield as well as brownfield) on acalendar year basis as depicted under IEMs (Industrial Entrepreneurs Memorandum excludingDirect Industrial Licenses) grew from 1909 in 2015 to 2256 in 2016 - a growth of 18%.From January-March 2017 the number of investment proposals was 557 as against 543 inJanuary-March 2016. In value terms the proposed investments (excluding Direct IndustrialLicenses) for calendar year 2016 were Rs 410422 crore (Rs 307357 crore in 2015) –depicting a growth of more than 33%. Key sectors which attracted investments includeElectrical Equipment Transportation Metallurgical industries Chemicals (exceptFertilisers) Cement and Textiles.

On the external front the current account deficit (CAD) has been narrowing downprogressively from 1.7% of GDP in FY2014 to 1.1% in FY2016 and is expected to improvefurther. The contraction in the CAD was primarily on account of a lower trade deficitbrought about by a larger decline in merchandise imports relative to exports. India'sexport growth which was in negative territory in the first half of FY2017 reboundedsignificantly in the second half and recorded a growth of 27.6% in the last month ofFY2017. Imports also indicated a similar trend.

BANKING ENVIRONMENT

Since the global financial crisis (GFC) leading Asia Pacific Region (APR) banks haveoutperformed the global banking sector. The region is already witnessing new types ofcompetitors from the rapidly-developing Fintech sector and mega banks rising across theregion (the recent SBI merger) enabling banks to operate more easily across borders.

Meanwhile in FY2017 Indian banks remained in the limelight initially due to thelingering asset quality issues and thereafter due to demonetisation. In H1 FY2017 for AllScheduled Commercial Banks (ASCB) both deposits and advances growth remained subdued andwere moving in the range of 8-11%.

On 08 Nov 2016 Honourable Prime Minister demonetised the high value Rs 500 and Rs1000 notes which amounted to Rs 15.44 lakh crore (86% of the value of the total amountof currency in circulation). The concerted efiorts by banks helped the Government tosmoothly surpass the 50-days' time period given to deposit/change the demonetised notes.Demonetisation led to increase in deposits of the banks. The fortnightly data of ASCBindicates that aggregate deposits increased by 11.8% in FY2017 after declining in thelast three years. Meanwhile credit ofi-take (YoY) declined to a 63-year low of 5.1% inFY2017 compared to previous year's growth of 10.9%. The decline in credit is mainly due tolow demand for credit from the corporate sector. There has been a shift of loan demandfrom the better rated entities to the bond market as yields ofiered in the primary marketshave fallen below the base rate for certain maturities. Thus incremental lending duringthe financial year has been mostly to the personal loan segment especially Housing andother personal loans. Interestingly banks have surpassed the target of Rs 1.80 lakh croreof Mudra loans in FY2017 by sanctioning Rs 1.81 lakh crore to 3.97 crore accounts. In thelast 2 years banks have given Mudra loans to 7.46 crore MSME units. Thus with the thrustof the Government and efiorts by banks Mudra loans now account for around 2% of the ASCBloan portfolio.

In the post demonetisation period (11 November 2016 to 31 March 2017) aggregatedeposits have increased by Rs 7.4 lakh crore while credit ofi take during the same periodhas increased by Rs 5.5 lakh crore. The huge infiow of deposits has pushed the share ofCASA deposits in aggregate deposits by around 4 percentage points relative to thepre-demonetisation period. As the limits on withdrawals have been removed people havestarted withdrawing their deposited money gradually.

Following the surfeit of liquidity and low credit growth SBI has taken the lead (andfollowed by other banks) by slashing the MCLR rate by 90 bps to 8.0% on 01 Jan 2017.Following SBI a number of public and private sector banks have reduced their MCLR in therange of 10-85 bps.

The process of demonetisation has opened up huge potential for digital channels. Therehas been a significant jump in transactions in all digital modes of payments like PoSm-wallets mobile banking IMPS and UPI. The debit + credit card transactions at PoSincreased to Rs 686 billion in March 2017 (with peak reached in December 2016 at Rs 892billion) compared to merely Rs 519 billion in October 2016. Also the number of PoSterminals has increased from 14.0 lakh in April 2016 to 25.3 lakh as of March 2017. Justin a period of 5 months (November-March) Indian banks have been able to set up 10.2 lakhPoS terminals almost 6700 PoS terminals per day. The size of digital banking (includingcredit card + debit card transactions through PoS terminals transactions through PrepaidPayment Instruments like m-Wallet PPI cards etc. and mobile banking) has increased toaround Rs 2500 billion from Rs 950 billion in April 2016 with the lion's share capturedby SBI.

State Bank of India has merged its five associate banks and Bharatiya Mahila Bank withitself from 1 Apr 2017. This is the first such large scale consolidation in the IndianBanking industry. With this merger SBI has entered into the league of top 50 global banks(up from 55th position in 2016 Source: The Banker July 2016) with a balance sheet sizeof Rs 33 lakh crore with 24017 branches and 59263 ATMs servicing over 42 crorecustomers. The increased balance sheet size will enable the bank to command better termsin both international and domestic markets. The added branch network customer base andstafi strength will help it expand reach and enable the bank to rationalise resources andredundancies across the board. The Bank's endeavour will be to optimise costs and maximiserevenues through the merger synergies leading to significant cost savings and reductionin cost-to-income ratio.

Meanwhile under the Pradhan Mantri Jan Dhan Yojna (PMJDY) banks have opened 28.6crore of accounts with Rs 64365 crore deposits till 17 May 2017. In FY2017 alone bankshave opened 6.7 crore Jan-Dhan accounts out of which 2.6 crore accounts were opened inthe post demonetisation period. On a positive note zero balance accounts under PMJDY havebeen continuously declining from 45% in September 2015 to 24% in March 2017.

Recently RBI released a discussion paper on a new category of banks - wholesale andlong-term finance banks which will fund large projects. These banks will be focusingprimarily on lending to infrastructure sector and small medium & corporatebusinesses. They will also mobilise liquidity for banks and financial institutionsdirectly originating priority sector assets through securitization of such assets andactively dealing in them as market makers.

The stress in asset quality of Indian banks continued to remain elevated in FY2017. Dueto a high proportion of NPAs net profits of most banks have declined as a result ofhigher provisioning. This in turn has impacted their return on assets (RoA) and return onequity (RoE) adversely. However all possible solutions for resolution of stressedaccounts are being worked out by the Government RBI and the banks. The recentpromulgation of the ordinance giving greater powers to RBI is a novel step to tackle theproblem of asset quality. The ordinance has a provision under which the Government mayauthorise RBI to issue directions to any banking company to initiate insolvency in respectof a default under the provision of the Insolvency and Bankruptcy Code 2016. It also hasprovisions for empowering the RBI to issue directions to banking companies for resolutionof stressed assets. Further measures like forensic audit in those accounts where there islack of cooperation operationalising commercial division of high courts implementationof bankruptcy code among others are also likely to have a positive impact on the assetquality of banking system.

Meanwhile Indian banks will need recapitalisation even as asset quality improves overmedium term. Empirical evidence suggests that there are definite scale economies inbanking when recapitalisation is introduced.

The interesting part is that as per the limited information available in public domainChina had injected $127 billion into their banking system during 2004-07 while the US Fedinjected $2.27 trillion following the 2008 crisis. In contrast during the periodFY2006-FY2017 cumulative capital infusion into PSBs in India was at $17 bn.

OUTLOOK

The year 2017 will be the most crucial in the second decade of the 21st Century. Thepressurepointssuchassluggishimprovement in economic conditions worldwide structuralunemployment underutilisation of capacity growing digital trades labour savingtechnology and geopolitical confiicts have reached a critical mass. Protectionism is onthe rise in the US and EU and financial stability will be under stress in the EU. Thesefactors will create a band of uncertainty around the global growth outlook in 2017 whichis largely positive. The financial markets may therefore witness uncertainty during thisyear and beyond.

While the political discourse worldwide may indicate a decline in globalisation trendsthe growing digital fiows have become a new form of globalisation and the appreciation ofthis fact will take some time to percolate. The expansionary nature of global value chainsthat marked the liberalised regime in 1990 will now give way to more localised production.It is in this context that India is hoping to revive its growth prospects.

In the coming year India's economy will have many challenges to surmount. Theprotectionism of the West may constrain our ability to cater to export markets. Theeconomy's employment generating potential needs a further thrust. Doubling of farm incomesto support the aggregate demand needs to be pursued with full sincerity without hurtingfinancial stability. Critical infrastructure such as internet connectivity regional airconnectivity rail connectivity water conservation and port connectivity need push on warfooting. National Policy on Standards has waited too long and must be drafted andimplemented at the earliest to realise the full potential of ‘Make in India'. Theimplementation of GST paving the way for a unified national market in goods and servicesmust reach its logical conclusion during this year. The Government has set a target toconstruct as many as 12 lakh houses under Pradhan Mantri Awas Yojana (Urban) in FY2018.This scheme was launched in 2015 to ensure housing for all by 2022. However theGovernment has to overcome the challenge of land acquisition to successfully achieve thistarget.

India's growth fundamentals continue to remain intact. Low infiation good agriculturegrowth and declining power shortages are indication towards a bright future. Thus thetime is opportune to take a decision on the Second Generation Reforms encompassing vitalsectors such as banking bureaucracy judiciary and industry. The first generation ofreforms has completed 25 years and the law of diminishing returns has now set inpreventing a full scale revival. The consolidation in banking with mergers of AssociateBanks may set a template for future consolidations. However this needs to be supplementedwith better HR practices to boost productivity much higher standards of customerservicing and enduring value creation through judicious use of technology.

Overall both monetary and fiscal policy will be conducive for stable economic growth.Even if the monetary policy is in neutral mode ample liquidity post demonetisation willkeep the interest costs down. Consolidation in the fiscal space will make room for privateinvestment. We do not see any material departure from either the monetary or fiscal policystance in the current fiscal.