India’s State Bank Aims for Top 50 Rank

May 25 , 2011

State Bank of India (SBIN) Chairman Pratip Chaudhuri said last week’s 99 percent drop in earnings represented “a quarter we’d like to forget” as the lender embarks on an expansion plan aimed at making it one of the world’s top 50 lenders by assets.
The bank expects a widening in net interest margins to help turn around its business, supported by the sale of 200 billion rupees ($4.4 billion) of shares to the government and other shareholders by Sept. 30, or end-2011 in a “worst-case” scenario, Chaudhuri, 57, said in an interview at the bank’s Mumbai headquarters yesterday.
State Bank, with more than 13,000 branches, is trying to revive earnings and replenish capital that has declined to just under 12 percent of assets, less than two-thirds the level of ICICI Bank Ltd. (ICICIBC), the second-biggest lender in the South Asian nation. Chaudhuri, who became chairman on April 7, said a focus on credit quality is critical to expanding the balance sheet of the bank, which he said is not ranked among the top 70 lenders by assets worldwide.
“Capital is getting low even by international standards and it will be a constraint on the credit growth,” Brian Hunsaker, an analyst at Keefe, Bruyette & Woods in Hong Kong, said in a May 23 telephone interview. “If the government earmarks the funds for subscribing to the bank’s rights issue, it will allay a lot of concerns.”
The 205-year-old lender is the third-worst performer on Bloomberg Asia Pacific Banks Index this year. Its shares have fallen about 21 percent, compared with a 12 percent decline in India’s benchmark Sensex Index.

‘Lackluster’

The stock slumped 7.7 percent on May 17, when State Bank reported net income of 208.8 million rupees for the quarter ended March 31, from 18.7 billion rupees a year earlier. Profit had been estimated to increase to 30.8 billion rupees, based on the average of 27 estimates compiled by Bloomberg.
The quarter was “lackluster,” with profit weighed down by the need to comply with tougher provisioning requirements from the central bank and to meet pension obligations, Chaudhuri said. Going forward, the lender’s net interest margin should widen to about 3.5 percent after declining to 3.3 percent during the March quarter, he said.
Nine interest rate increases from the Reserve Bank of India since March 2010 and a slowing economy hurt State Bank’s asset quality in the three months through March, forcing a 77 percent increase in provisions. Further defaults are a risk as borrowing costs continue to rise, so the lender will focus on loans that are secured with collateral or cash flows, Chaudhuri said.

‘Very Vigilant’

“We have to be very vigilant,” he said. “If we say all is well, that will amount to complacency.” India is not yet in “negative interest rate territory,” and borrowing costs for companies and individuals will be “slightly higher,” he said.
The government, which owns 59.4 percent of State Bank and wants to maintain its stake, needs to agree on the timing of a rights offer. The bank has more than 200,000 employees and plans to hire about 9,000 in the year ending March 2011, and expanded lending by 20 percent in 2010. Chaudhuri said he wants to continue to grow while maintaining capital equivalent to 12 percent to 13 percent of assets. The Reserve Bank of India said bank credit growth will slow to 19 percent this year.
The bank will continue to raise funds from overseas markets to fund its business outside India, though it has no immediate sale plans, Chaudhuri said. “Our international book is presently at about $34 billion” and is likely to see a 20 percent growth rate annually, he said. That translates into need for additional funds of $7 billion a year, and the lender may fund up to $5 billion of that through bond sales, Chaudhuri estimated.
About 70 percent of State Bank’s overseas lending is to Indian companies and the dollar continues to be their favored currency for borrowing because of its depreciation, he said.
“Our ambition is to become one of the world’s top 50 banks,” Chaudhuri said. “We should have a diversified asset base, diversified liability or funding base and should be present in all segments of banking.”