Is SBI a good investment?

State Bank Of India company analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/23/20233 min read


  1. What is a good investment?

  2. What are the factors to be considered while analysing banks?

  3. How does the State Bank Of India perform on these factors?

  4. Is State Bank Of India a good investment?


1. What is a good investment?


Ben Graham defined investment as below:


“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”


If I had to invest any amount I would look at the following criteria.


What’s the current rate of inflation?

How much are the bonds yielding, especially the 10Y?

Are there any investments which can give me more return than the bonds above?


The answers currently as on 20-07-2023 according to me would be as follows:


Around 4-5%

Around 7%

Investing in an index ETF has returned over 7% in the last 10 years if I am not wrong.


From the above it seems that at a minimum we should target a return of more than 7% for any investment that we make at present considering the data points above.


But how do we know if State Bank Of India can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analysing banks?


The following ratios can help us to know if a bank is a good investment.


a. ROE over the last 10 years

b. Net Interest Margins over the last 10 years

c. Non Performing Assets Ratios over the last 10 years

d. Leverage (Debt / Equity) over the last 10 years

e. Coverage ratios over the last 10 years



3. How has the State Bank Of India performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between -2.21% and 16.80% in the last 10 years.


b. Net Interest Margins over the last 10 years


NIMs have been in the range of 2.27% to 2.86% in the last 10 years.



c. Non Performing Assets Ratios over the last 10 years


Gross NPAs have been between 2.8% and 10.9% in the last 10 years.


Net NPAs have been between 0.7% and 5.7% in the last 10 years.


d. Leverage (Debt / Equity) over the last 10 years


Leverage has been between 18x and 19.6x over the last 10 years.


e. Coverage ratios over the last 10 years


Capital Adequacy Ratio has been between 12.7% and 14.7%.


Provision Coverage Ratio has been between 50.4% and 76.2%.


4. Is State Bank Of India a good investment?


Based on the above factors State Bank Of India does not seem to be satisfying the criteria of safety of principal.


Now let's look if it can provide a satisfactory return. Based on the CMP of 600 and EPS of 60 its yield is around 10% which is an average return.


Even if we consider that sales and profits have grown at more than 8% compounded for the last 10 years it means its sales and earnings could double every 9 years if it continues at the same pace.


Current earnings - say x

Earnings in 9 years - 2x

Earnings in 18 years - 4x


At the end of Mar 2023 , EPS was around Rs.60 and price was around Rs.500 giving a P/E of 500/60 which is approximately 8.3.


If the above assumptions are correct the EPS in March 2041 would be 60 * 4 = Rs.240.


Assuming a P/E of 10 the price would be 240*10 = Rs.2400 which is 4.8 times the price of Rs.500 at the end of March 2023.


If we consider a price increase of 4.8 times in 18 years it indicates a growth of around 9% which is an average return.


If you would like to know more about growth investing by which we assumed the returns and prices above, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw





Conclusion


State Bank Of India is an average business and does not promise a satisfactory return from these levels in the short/long term even if it continues to grow at the same pace that it has been growing in the past.