India’s largest commercial bank, State Bank of India (SBI), is ready for a public float that will raise its capital adequacy ratio and bring down government holding to 55% from around 60% at present.
The follow-on equity offer, which comes 13 years after the bank’s initial public offer, will come soon, says Om Prakash Bhatt, chairman, SBI. At the share’s closing price of Rs926.75 on the Bombay Stock Exchange on Tuesday, a 5% stake in SBI is worth over Rs2,400 crore.
The legislation that governs SBI states that the government’s stake in the bank cannot fall below 55%. In December 1993, SBI made an IPO at a premium of Rs90 (on shares with a face value of Rs10). Subsequently, in October 1996, it made a global depository receipts (GDR) issue, the first by any Indian bank. The latest issue will likely be a domestic one. Although foreign institutional investors (FIIs) are ready to pay a premium for the SBI stock, a proxy for the Indian economy, they cannot increase their stake in the bank as the collective foreign holding (FII plus GDR) in it is close to 20%, the maximum permissible under the law.
SBI finds the issue necessary to meet capital adequacy norms. Indian laws mandate a minimum capital adequacy ratio of 9% for banks. This means that for every Rs100 that banks lend out, they need to have a capital of Rs9. Thus far, SBI has been raising long-term bonds to boost its capital. However, these constitute tier-II capital of a bank while equity and free reserves form tier I, or core capital, which should not go below 8% in ideal circumstances. With its assets growing at around 25%, SBI’s tier-I capital is around 8% now and unless it infuses fresh capital, the bank will find it difficult to grow its business in 2007-08.
The SBI stock is trading way below its 52-week high of Rs1,378.70. At Tuesday’s price, its market capitalization, at Rs48,775 crore, is much lower than that of India’s largest private bank ICICI Bank’s Rs71,962 crore. ICICI Bank has been growing at a faster pace than it.
SBI has closed the first nine months of 2006-07 with a net profit of Rs3,048 crore. ICICI Bank’s nine months’ net profit was Rs 2,285.10 crore. As on 31 March 2006, SBI’s total assets stood at Rs4,94,001 crore, deposits at Rs3,80,046 crore and advances Rs2,61,642 crore. The corresponding figures for ICICI Bank were Rs2,52,059 crore, Rs1,65,083 crore and Rs1,46,163 crore.
Bhatt, who took over the reins of the bank in July 2006, is readying a blueprint for the bank’s general-insurance foray to boost its valuation. SBI has also embarked on an ambitious plan of setting up “limited” banks in one lakh villages across India. These will be one-person units with a computer and telephone, and facilitate banking transactions in villages which have no bank. And in its large city branches, the bank is offering equity-trading services to its private-banking customers.
In an exclusive interview with Mint, Bhatt outlines the bank’s business plans to maintain and grow its profitability and stem the fall in market share. Extracts:
You are losing your market share in banking assets continuously. You won’t remain the leader for long.
Assets may not be an accurate parameter to determine a bank’s market share. Deposits are a better indicator, as once deposits are mobilized, it is up to the bank to use the money in the best possible way it wants. However, even in terms of deposit portfolio, we have been losing our market share for more than a decade now. It (the loss) has been accelerated recently and in 2005-06 we had lost close to 2% market share. In the first six months of 2006-07, we lost almost half a percentage point. But thereafter, in the last six months, we have grown our market share in some months and lost in some months. So, it’s clear that our efforts have started bearing fruit. We will be able to maintain our market share and even grow from now.
You must be paying very high rates to ‘buy’ this deposit growth. Other banks say you’re spoiling the market by jacking up deposit rates.
Certainly not. We anticipated the liquidity crunch and started offering 9.5% for retail deposits ahead of competition. As far as the bulk deposits are concerned, we never paid more than 10.75%. We have acted with great restraint and showed the kind of maturity and responsibility that a leader should have shown. In fact, we could lend at the call money market at 70%-80% when other banks wanted money because we had resources. From the business point of view, we made money on these few days but, more important than that, we acted like a leader and lent money to those banks which were looking for resources in the last week of March. We continue to be the market leader in Indian banking.
You recently gave a “do or die” call to your colleagues and asked them to aggressively mobilize rural deposits. Aren’t you showing your desperation?
It’s not a call of desperation. It is a wake-up call to galvanize employees and executives. Rural pockets can be an engine of growth for us. We have 3,300 branches in rural India and the business now accounts for about 22% of the bank’s total business. We want this to grow to around 33% over the next few years. There is so much of prosperity in rural India… People are watching TV and riding mopeds even in remote villages and you’ll find Hindustan Unilever products there. We plan to raise Rs12,000 crore in four months between March and June. We have already raised Rs2,000 crore in March. Not a bad beginning.
You also plan to reach out to one lakh villages.
Yes, in the next 12-18 months, State Bank will play the role of a business facilitator in one lakh villages where no bank has opened any branch. We are looking for “limited” banking, permitted by the banking regulator. Under this scheme, one person will be trained and authorized by the bank to conduct limited banking businesses in these villages with the help of a computer terminal and a phone. One lakh people will be hired on contract to facilitate banking transactions in these villages. They will not offer bank drafts or letter of credit but help the bank mobilize deposits and offer small loans. We are running three pilot projects in Mizoram, Medak (Andhra Pradesh) and Pithoragarh (Uttarakhand). Biometric smart cards are being distributed among villagers for transaction of business.
It seems to be a very ambitious project. Will you able to pull it off, particularly when customer service in the bank is going down?
It’s an ambitious task and I’m not sure whether we can pull it off but it is very important to try… I am not willing to accept that our customer service is going down. It has improved considerably but always there is scope for further improvement. Out of 10,000 branches, there could be 100 branches where customer service is not to the desired level, but overall it is much better.
We have done more than 1,000 modifications in the core banking solution that has been put in 4,000 branches. About 85% of our business is covered by the core banking solution and we hope to cover the entire business and all bank branches by the end of financial year 2008. (Once the core banking solution is in place, a customer ceases to be the customer of a branch and instead become the bank’s customer and can conduct business at any branch of the bank.)
Your focus is mostly on rural branches. Does this mean you are conceding defeat in urban centres where private banks are snatching your customers?
We have 100 million customers and nobody can match that. In urban centres, we are aggressively pushing private banking. From June 2007, 100 SBI branches will run equity trading desks. We have tied up with Motilal Oswal, a domestic brokerage, for this. I am sure with this, young customers who were planning to leave the SBI fold will change their mind and stay with us.
Don’t you need fresh capital to grow your business?
Yes, we need fresh equity as our tier-I capital is now around 8%. In the past, we have raised debt to boost our tier-II capital but now we need tier-I capital. We will have a public float soon. This will be largely a domestic issue...
Where is the scope for this? The RBI stake in your bank, which is being transferred to the government, is 59.72% and it cannot go down below 55%.
There can be at least 4% dilution. We will have to go for that.
Have you appointed investment bankers for the float?
They are making presentations but we have not yet appointed the bankers. We will finalize the plan in three-four months and the exact time of the public issue depends on the market conditions. It will be done fairly soon.
You also have plans to take some of your associate banks to the market.
Yes, we do. We need to see the valuations of our associate banks and accordingly decide the timing of their public issues but before that let us first get a grip on our own capital-raising plans.
We believe you have finalized your plan to enter the general-insurance business.
Yes. It has not yet gone to the board but the blueprint is ready. We will soon approach the regulator and once the regulatory nod is in place, we should be able to set up our general-insurance business in the next six months. We will have an overseas partner for this venture. Quite a few general-insurance players have approached us, but we have not yet identified the partner.
You seem to have set your eyes on a US bank for acquisition?
No. We are interested in acquiring a fairly large bank overseas to strengthen our global presence but we have not zeroed in on any bank. We are not actually actively looking for an acquisition, but if something comes on our way we will certainly consider it. As I had already said, we would not go for small banks, spending a few million dollars. We will look for a fairly large entity.
With interest rates rising, do you see a problem going forward?
I don’t see any problem on the liquidity front. Money will now flow from mutual funds to fixed deposits of banks. Credit demand will continue to be there and I don’t think anybody is against growth. For the time being, to contain inflation, growth will be reined in but will not impact us over the medium and long terms.
Won’t your profitability be hit?
With interest on banks’ cash reserve kept with RBI going down sharply, our income will go down, but when the economy is growing, there will be new opportunities and we need to seize them. It all depends on how we manage (our business). I am fairly confident that we will be able to ride out this phase.