Chairman O.P. Bhatt of State Bank of India (SBI) has set an ambitious target of 50% growth in net profit for fiscal 2009.
The operating profit growth target has been set at 40%. The aim is to have a return on assets (RoA) of 1.10% and a return on equity (RoE) of 15.25% for the fiscal year.
Net profit growth during the nine months to December 2007 has been 59%, while RoA has improved to 1%. But RoE is projected to decline from the current 18%, thanks to the recent rights issue.
How does the bank propose to meet the targets? By ramping up its advances and deposits growth. It will aim to grow its advances by around 35%, while deposit growth has been pegged at 33%. Since these growth rates are well above that of the banking sector as a whole, the objective is to increase market share.
Spearheading the growth will be home loans, where the goal is to increase advances by 100% next fiscal year. Less aggressive targets of 30% growth in auto and education loans have also been chalked out. The expectation is that the impact of the recent lowering of interest rates should be made up by higher volumes. The target is to beat ICICI Bank and become the No. 1 bank in retail by the end of FY09. SBI also plans to tap the under-banked trading community with the aim of becoming the bank of choice for traders, and targets for lending to the trade segment have been moved up accordingly.
Apart from raising the targets for credit growth, the bank has also planned for higher growth in fee income. Towards that objective, it has budgeted for a trebling of income from cross-selling life insurance, credit cards, general insurance and mutual funds. Overall growth in non-interest income has been pegged at 40%. Measures to increase non-interest income include increasing the bank’s equity portfolio by 25% to Rs6,000 crore, targeting higher income from derivatives and from foreign exchange transactions. Additional earnings are expected to come in from new businesses of pension fund management, private equity, custodial services, non-life insurance and financial planning services.
The bank has also emphasized that not only does it want its market share in deposits to go up by one percentage point during fiscal 2009, it also wants these deposits to be low-cost. That’s the reason it’s targeting an increase in the share of Casa (current and savings account) deposits by 3 percentage points. (As at end-December 2007, SBI’s Casa deposits constituted 41% of total deposits). The bank plans to open 2,000 branches in fiscal 2009, which will help it mop up deposits.
But these new branches will add to costs, which is why, in order to contain expenses, the bank has decided to peg overhead expenditure at the same level as at end-March this year. The expenses ratio, or the ratio of cost to income, which was 51.74% in the December 2007 quarter, is planned to be reduced to 49% next year.
SBI estimates that its strategy will lead to an improvement in its net interest margin. Non-performing asset (NPA) ratios are targeted to come down by at least 25 basis points, or 0.25 percentage point, from the levels prevailing at end-March this year. The net NPA ratio was 1.44% at end-December 2007 and this is expected to come down to 1.1% by the end of fiscal 2009.
The setting of such high targets should be cause for comfort, as it indicates that in spite of the recent concerns about the performance of Indian banks and the talk of a slowdown in the economy, the SBI management is confident that it will do even better in FY09.
Sensex: not with a bang, but a whimper
It speaks volumes about the state of the markets that even a 75 basis points (0.75 percentage point) cut in the Fed funds rate generated a mere 1.1% pop in the Sensex. If a 300 basis points reduction in the Fed funds rate and the promise by the US central bank to accept mortgage-backed securities as collateral for lending doesn’t stem market losses, it’s hard to imagine what will. As experts point out, the credit market problems are symptoms of an underlying malaise in housing in the US and things aren’t going to get better unless those issues are taken care of. What’s clear is that it’s going to take time.
So why the huge rally in the US markets on Tuesday? That’s probably because, in the words of investment adviser and blogger Michael Shedlock, “the end of the world that many were expecting did not come”.
In short, it was just a relief rally. As for the Sensex, the accompanying chart shows that while it reacted with a bang to the initial rate cuts, it has now given way to just a whimper.
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