Value unlocking another trigger for SBI

The move will increase the bank's capital base and aid further growth

The State Bank of India (SBI) management is looking to unlock value by listing one or more of its non-banking financial services companies (NBFC) such as insurance, credit cards, mutual funds and investment banking arms. The move will augment the bank's capital base and aid further growth for the bank. Given that most of these subsidiaries have joint venture partners, the decision to list has to be mutual and hence will take some time to implement.

SBI owns 74 per cent stake each in its life insurance and general insurance subsidiaries, 60 per cent in the cards and payments subsidiary, 63 per cent in its asset management company and 100 per cent in SBI Capital which also does investment banking. Analysts believe life insurance business has the highest value in SBI's NBFC companies and peg the same at about Rs 20,000 crore on an average. This is followed by the AMC business which is valued at about Rs 7,000 crore. The NBFC businesses together form about 12-15 per cent of SBI's consolidated sum-of-the-parts value. Analysts believe listing will bring multiple benefits to the bank as well as its subsidiaries.

 

Jignesh Shial of IDBI Capital says the listing of SBI's NBFC subsidiaries will improve their overall efficiency and enable SBI to exploit cross-selling opportunities aggressively and boost its fee income. The life insurance business, according to him, is the first one to list given that it's the largest contributor to SBI's NBFC business and is doing reasonably well on the profitability front.

 

As of September, SBI's Tier-I capital adequacy ratio stood at 9.6 per cent and is better than most peers in the PSU segment. Analysts believe SBI is well funded for the next one-and-a-half years and should not have any troubles in growing in this period. Operationally as well, SBI is better-placed than its PSU peers on the CASA (current and savings account) franchise and distribution network fronts. The bank's asset quality has been under pressure in recent times and while analysts expect incremental stress addition to be lower from here on, meaningful improvement in the same is likely only in the second half of FY16. SBI's loan growth is pegged at 12 per cent in FY15 and is likely to inch up to 14-16 per cent levels over the next two years. Its net interest margins are expected to be stable at around 3.2-3.3 per cent levels. In this light, most analysts remain positive on SBI.

 

"The SBI stock currently trades at 1.7 times FY16 estimated adjusted book value, closer to its mean valuation on one-year forward numbers. We have cut our loan slippage estimate by 20 basis points to 1.8 per cent and credit cost estimate by 10 basis points to 0.7 per cent for FY17. We feel SBI is a pure proxy play on economic revival," says Hatim Broachwala of Nirmal Bang Securities.