SBI reports record profit performance in FY23

Record profits reported by SBI

For a long time, SBI has been the largest bank by a margin, but never has it been the largest in terms of market value. HDFC Bank and ICICI Bank have consistently attracted valuations that were materially higher than SBI. One can blame it on the high level of NPAs that SBI was sitting on, but that is history and largely under control. The dominance of SBI is not just in the banking business, but its group companies are also the largest player in the private sector life insurance business and the largest in mutual funds AUM. With a dominance across corporate banking, consumer banking, life insurance, general insurance, mutual funds and credit cards, markets had consistently maintained that SBI was being undervalued in the markets. There were two reasons; asset quality and profits. In FY23, both these issues have been very convincingly addressed.

SBI profits rank right at the very top

A quick look at the table below tells you how SBI has turned its profit performance in FY23 to emerge as the second most profitable Indian company. Only Reliance Industries made more profits than SBI in FY23.

Data Source: Company filings

That is a stellar performance put up by SBI in FY23. If you look at the mix of ten of the most profitable companies, then five are from the financial sector. The big question is what triggered this massive surge in profits at SBI to Rs55,648 crores in FY23?

How SBI stole a profit March over Indian corporates

Most of the Indian banks (private sector and public sector) have been in a sweet spot for the last 3 quarters. The reasons were not far to seek. Between May 2022 and February 2023, the RBI raised the repo rates by a full 250 basis points from 4% to 6.50%. Since banks use the MCLR formula for pricing loans, the higher rates almost tend to get passed on immediately to lending rates and the banks start to realize a higher yield on their investments. However, the cost of deposits does not go up in tandem. Here is why.

There are 3 reasons why cost of deposits lags the yield on loans. Firstly, deposit rates always react with a lag since it is a policy measure by the banks. Secondly, the growth in advances for all banks has been consistently higher than the growth in deposits in the last one year. That has automatically accentuated these higher spreads. Lastly, a typical PSU bank has about 35-40% in CASA deposits while private banks have about 45-50%. These rates do not react to changes in market interest rates and that helped banks to widen margins. SBI, being the largest Indian banks, obviously made the best of this trend.

SBI Q4FY23: A story of soaring spreads

Behind the soaring profits of SBI and emerging as the second most profitable Indian company, is the story of how the spreads worked in their favour. Consider these numbers.

• For the March 2023 quarter, the net interest income (NII) was up 29.5% yoy at ₹40,393 crore while the NII for the full year FY23 was 20% higher at ₹144,841 crore. This is the spread that directly contributes to profits.
   
• Net interest margins (NIM) are a critical measure for banks. For the fourth quarter, SBI NIMs expanded by 44 basis points to 3.84%. In absolute terms, it is still lower than the larger private sector counterparts, but big enough to boost profits. 
   
• Banks these days, also earn from non-core sources like fee incomes, which are captured under other income. This header was up 17.5% YoY for Q4FY23 at ₹13,961 crore. However, other income was lower on a YoY basis. Credit costs and Cost to Income ratio were also lower for SBI.
   
• Finally, provisions and contingencies were down -54.2% yoy in the March 2023 quarter at Rs3,316 crore while full year numbers were lower by -32.5% at ₹16,507 crore for FY23. Gross NPAs also tapered by 119 bps on yoy basis at 2.78%.

How did all this translate into profits for SBI?

Nearly a third of the full year profits of SBI came only in the fourth quarter ended March 2023. For Q4FY23, total revenues were up 27% at ₹136,852 crore. In terms of revenues, there was sharp growth across retail banking, corporate banking, and treasury. The profitable bounce in consumer banking operating profits was the big boost to net profits in the fourth quarter and record profits in the full year FY23.

Let us now turn to operating profits. For Q4FY23, the operating profits were up 24% yoy while net profits were up 89.5% yoy. On the operating profit front, the boost came from consumer banking while net profits also got a boost from provisioning more than halving on yoy basis. The annualized ROA stood at a healthy 1.23%. 

For FY23, SBI reported net profits of Rs55,648 crore. Incidentally, this is the highest profit ever reported by SBI in any fiscal year. One can argue that going ahead, NIMs will trend lower. One can also argue that the merger of HDFC-HDFC Bank will be more profitable than SBI. But these are still hypothetical possibilities. For now, SBI is the second most profitable company in India and the most profitable Indian bank.

Content Source: BSE Filings