Executive Summary

Credit Risk Analysis and Management has existed for numerous decades and centuries to
become one of the most seasoned financial activities known. It refers to the study that the
creditor or supplier of credit conducts to judge the risks emanating from lending credit to a
borrower.
This report aims to analyse SBI – State Bank of India for credit risk analysis by applying the
EIIF framework – consisting of both qualitative and quantitative risk factors.

Objective

The objective of this project is to analyse SBI – State Bank of India from the perspective of a
lender using EIIF (External, Industry, Internal and Financial) risk factors and use it to arrive at
a credit rating for the company.

Introduction

State Bank of India is a multinational, public-sector banking and financial services body.
Founded in 1806 as the Bank of Calcutta and headquartered in Mumbai, Maharashtra, it is the
largest bank in India.
It has around 24000+ branches, 60000+ ATMs, and more than 200 foreign offices in 36
countries. It provides a huge array of banking products through its widespread network of
branches across the world debit and credit cards, savings and current accounts, home, personal
and education loans, fixed and recurring deposits. It also provides these services through its
online channels of Internet banking, mobile based YONO and SBI Kiosks as well apart from
the traditional brick-and-mortar channels. As a part of digital banking initiatives, SBI has also
launched SIA, an AI powered chat assistant for customer care – this chatbot answers queries
efficiently and diligently just like a bank representative.
 Scope and Methodology

Credit Risk Analysis has been mainly done by dividing the analysis into 4 segments:
1) External Factors – Economic Scenario, Government Policies, Financial Inclusion,
Interest Rates, Demographic Drivers, Fluctuations in foreign exchange rates, Trade
Deficits, Volatility and Inflation
2) Industry Factors – Credit Risk, Market Risk, Reputation Risk, Operational Risk,
Liquidity Risk, Systemic Risk, Moral Hazard Risk
3) Internal Factors – SWOT analysis, operational risks arising within the company
4) Financial Factors – Balance Sheet and P&L Analysis, Ratio Analysis, Cash Flow
Statement Analysis

EIIF Analysis

1. External Risk Factors

Following is a detailed study of the external risk factors of SBI.

1.1. Economic Scenario

After decelerating sharply from 8.2% in FY2017 to 7.2% in FY18 and then to 7.0% in
FY2019, India’s GDP growth is expected to grow by 7.2% (RBI projection) in FY2020.
Going forward, several factors appear crucial regarding economic growth.
Private Consumption is going to get a boost from measures such as
 Public spending in rural areas and increase in disposable income of households
due to income tax benefits
 Resolution of stressed assets and decline in the level of nonperforming advances
(NPAs) on Bank balance sheets is expected to improve credit flows, which
augurs well for economic activity
 improving capacity utilisation, tailwinds from lower oil prices and rate cuts are
likely to support economic activity
 projection of ‘near normal’ monsoon this year with weak El Niño will be helpful
for food grains production and subsequently for food inflation.

Rising per capita income will lead to increase in the fraction of the Indian population
that uses banking services. Population in 15-64 age group is expected to grow strongly
going ahead, giving further push to the number of customers in banking sector.

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1.2. Government Policies
Capital Infusion Scheme
Approved extension of Rs 343 crore (US$ 51.16 million) to be infused for three years
till FY20 in regional rural banks (RRBs) which will strengthen their lending capacity.
Atal Pension Yojana
Under the scheme, subscribers would receive the fixed pension of up to Rs 5,000 (US$
74.58) at the age of 60 years (depending on their contributions). The Central
Government will also co-contribute 50 per cent of the subscriber's contribution or Rs
1,000 (US$ 14.92) per annum, whichever is lower, to each eligible subscriber account,
for a period of 5 years.
Pradhan Mantri Jan Dan Yojana
Under this scheme,316.7 million accounts were opened (as of May 23 2018). Under the
scheme, each & every citizen were enrolled in a bank for opening a Zero balance
account. Each person getting into this scheme will get an Rs. 30,000 (US$ 447.49) life
cover with opening of the account. Thus, increasing the customer base of the banks.
1.3. Financial Inclusion
Following are the latest developments in the direction of FI:
 Customer Service Points (CSPs) are now offering Banking Services (Enquiry,
Deposit and Withdrawal) to FI Customers at their Door Step, by using Portable
Hand Held Devices.

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  Mobile Number seeding facility has been made available to the FI Customer
account through the FI Kiosks.
 Additional Fields have been added in Kiosk for capturing CSP details to
effectively monitor functioning of CSPs.
 Aadhaar Authentication for PMJJBY, PMSBY, APY and Green Pin Services
have been enabled during the year.

1.4. Interest Rates

The banking sector's profitability increases with interest rate hikes. Institutions in the
banking sector, such as retail banks, commercial banks, investment banks, insurance
companies, and brokerages have massive cash holdings due to customer balances and
business activities.

The banking sector's profitability increases with interest rate hikes. Institutions in the
banking sector, such as retail banks, commercial banks, investment banks, insurance
companies, and brokerages have massive cash holdings due to customer balances and
business activities.

Increases in the interest rate directly increase the yield on this cash, and the proceeds
go directly to earnings. An analogous situation is when the price of oil rises for oil
drillers. The benefit of higher interest rates is most notable for brokerages, commercial
banks, and regional banks.

The Bank is also exposed to interest rate risk through its treasury operations and through
one of its subsidiaries, SBI DFHI Limited, which is a primary dealer in Government
securities. A rise in interest rates or greater interest rate volatility could adversely affect
the Bank’s income from treasury operations or the value of its fixed income securities
trading portfolio. Sharp and sustained increases in the rates of interest charged on
floating rate home loans, which are a material proportion of its loan portfolio, would
result in extension of loan maturities and higher monthly instalments due from
borrowers, which could result in higher rates of default in this portfolio.

The Bank's domestic deposit portfolio grew by 8.27 % i.e. ₹ 28,14,243 crore during FY
2018-19. The Domestic Savings Bank deposit registered a YTD growth of 8.58 % i.e.
₹ 10,85,151 crore while the term Deposit portfolio, despite declining interest rates, has
registered a YTD growth of 8.13% i.e. ₹ 15,26,958 crore during FY 2018-19.

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 1.5. Demographic Drivers
Favourable demographics and rising income levels. India ranks among the top six
economies with a GDP of US$ 2,597 in 2017 and economy is forecasted to grow at 7.3
per cent in 2019. The sector will benefit from structural economic stability and
continued credibility of Monetary Policy.

1.6. Fluctuations in foreign exchange rates

As a financial organisation with operations in various countries, the Bank is exposed to
exchange rate risk. The Bank complies with regulatory limits upon its unhedged foreign
currency exposure by making foreign currency loans on terms that are generally similar
to its foreign currency borrowings and thereby transferring the foreign exchange risk to
the borrower or through active use of cross-currency swaps and forwards to generally
match the currencies of its assets and liabilities. However, the Bank is exposed to
fluctuations in foreign currency rates for its unhedged exposure. Adverse movements
in foreign exchange rates may also impact the Bank’s borrowers adversely, which may
in turn impact the quality of its exposure to these borrowers. Volatility in foreign
exchange rates could adversely affect the Bank’s business, future financial performance
and the trading price of the Equity Shares.
1.7. Trade Deficits
India’s trade relationships with other countries can influence Indian economic
conditions. In fiscal year 2016-17, India experienced a trade deficit of US $ 112.4
billion, in fiscal year 2017-18, a trade deficit of US$ 160.0 billion. If India’s trade
deficit increases and becomes unmanageable, the Indian economy, and therefore the
Bank’s business, future financial performance and the trading price of the Equity Shares
could be adversely affected.
1.8. Volatility or Inflation
Headline CPI inflation has declined sharply since mid-2018, driven by the sustained
fall in food inflation, the waning away of the direct impact of house rent allowances for
central government employees, and more recently, by a sharp fall in fuel inflation.
Owing to that the average CPI inflation for FY2019 stood at 3.43% compared to 3.58%
in FY2018. The rate is measured by the change in the annual price index for personal
expenses. According to the FMOC, a rate lower than 2 percent could mean that prices
and wages are falling, the sign of a weak economy. A higher rate of inflation is
undesirable because it makes it harder for investors and borrowers to make long-term
financial decisions.

2. Industry Risks

SECTOR vs INDUSTRY vs MARKET SEGMENT

Sector: Banking

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Industry: Finance

Market Segment: Domestic

Introduction

The banking sector is one of the fastest-growing sectors in the country in the last five years.
India is considered as the market leader in the banking sector. With respect to the advanced
technology and other factors, SBI is adaptable to all such technology innovations and can make
customers transactions easily.

Market Size

SBI being the market leader in the banking sector has a huge market share Some values of the
banking sector and SBI are mentioned below

 Overall, the value of public sector banks has increased from 1.52 trillion in the year
2017 to 1.56 trillion in the year 2018
 Total lending has increased at a CAGR of 10.94 percent during FY07-18, and total
deposits have grown at a CAGR of 11.66 percent, during FY07-18 and are further
poised for growth, backed by demand for housing and personal finance
 The total number of ATMs in India increased to 205,866 in 2018 and is expected to
increase to 407,000 by 2021, out of which 50,000+ are from SBI
 India had the foreign exchange reserves of approximately US $393.72 billion as on
November 2018
 From FY 2007–2018, deposits grew at a CAGR of 11.66 percent and reached the US
$1.6 trillion by the financial year 2017. Deposits at the end of 3rd Quater FY2019 (as of
Dec 2018) stood at Rs 120,818.92 billion
 Strong growth in savings by rising disposable income levels are the significant factors
influencing deposit growth

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  Due to government efforts to promote banking-technology and promote expansion in
unbanked and non-metropolitan regions, access to the banking system has improved
 India’s banking sector has remained stable despite upheavals but retaining the
confidence from the public over the years
 Deposits under PMJDY (Pradhan Mantri Jan Dhan Yojana), have increased to Rs
100865.66 crore and 361.4 million accounts were registered in India as on July 2019

In FY 2018, SBI has a market share in

 Deposits – 22.38% from 22.84% in 2018

 Advances – 20.09% from 19.92% in
2018
 Debit card – 29.89% from 30.40% in
2018
 Decrease in branches from 22,414 in
2018 to 22,010 in 2019

GOVERNMENT INITIATIVES AND INVESTMENTS

According to the financial report of SBI group released by the bank, there is a decrease in
investments by SBI from 10,60,987 Crores in 2017-18 to 9,67,022 Crores in 2018-19 which is
around 8.86%, due to increase in corporate lending coupled with the calibration of term deposit
rates to have more optimal Asset Liability structure.

Being a government’s bank, SBI has standard investments from Indian government and is
ready to change the system into the digital banking system.

Some of the investments and government initiatives in India, which are useful for SBI, are:

 Pradhan Mantri Suraksha Bima Yojana,

which is mainly for accidental death insurance cover for up to Rs. 2 lakh. Gross amount
under the scheme reached 134.8 million as on 2018-April
 Pradhan Mantri Jeevan Jyoti Bima Yojana covers life insurance. Gross registration
under the plan reached 53.3 million (as on 2018-April)

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  Atal Pension Yojana, in which people get pension of up to Rs.5,000. As of May 2018,
the total number of subscribers was 11 million
 Pradhan Mantri Jan Dhan Yojana, each & every citizen will be enrolled in a bank for
opening a Zero balance account. Under this scheme, around 316+ million accounts were
opened

INDUSTRY RISKS

The probability of occurrence of loss for a particular event is defined as Risk. SBI being a
banking sector firm and a leading company, it has few industry risk factors and is mentioned
below

 Credit Risk
 Market risk
 Operational Risk
 Liquidity Risk
 Reputation Risk
 Business Risk
 Systemic Risk
 Moral Hazard Risk

SBI has a separate committee, which monitors and controls the risks mentioned above. This
committee is called as Risk Management Committee of the Board (RMCB). This RMCB was
constituted on 23rd March 2004.

 Credit Risk: Credit risk is mostly related to loans, bank transactions, acceptances,
trading, forex, financial futures, bonds, equities, options, and commitments and
guarantees, and settlement of transactions. SBI being the market leader in the banking
sector in India, has around 56.60% of Risk-weighted assets in 2019, which is a decrease
from 60.66% in 2018. The total Risk-Weighted Assets ratio is decreased by 2.34% as
of March 2019.
This credit risk is reduced by strengthening the onboarding sector specialists and
improved due diligence. SBI has a separate risk management framework for identifying
the industrial status and other factors. There are around 39 different sectors, which
consists of around 71% of the total banks' outstanding amount. Even RBI has allowed
SBI to participate in the parallel run process for FIRB (Foundation Internal Rating
Based) under the advanced approaches for Credit Risk. The capital requirement for
credit risk for SBI is Rs. 1,43,298.45 Crores

 Market Risk: Market Risk is defined, as the risk of losses in the bank is the trading
book - due to changes in equity prices, interest rates, credit spreads, foreign exchange
rates, and other indicators whose values were set in a public market. SBI has a market
risk management system where it consists of identification and measurement of these
risks and to control, measure them.

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 SBI has a separate department to control the market risk named as Market Risk
Management Department (MRMD). These market risks are managed through risk
limits, such as Value at Risk (VaR), VaR is one of the tools used to monitor the
uncertainty in the bank’s portfolio. SBI has asset class-based risk calculation. The net
market risk for SBI is lower compared to other banks. The capital requirement for
market risk for SBI is Rs 16,398.91 Crores

 Operational Risk: Operational risk is defined as the risk of loss because of insufficient
or failure in the internal processes, people, and systems or external events. This also
represents legal risk but not strategic and reputation risk. Operational risk can occur in
banks due to human errors or mistakes based risk calculation. Human Risk, IT/System
Risk, and Processing risk come under operational risk.
The operational risk for SBI has increased, and there was considerable
market volatility, adversely influencing treasury operations. There are few components
to ensure better capital management and improve the quality of banking services. SBI
observers Risk awareness on 1st September every year. The capital requirement for
operational risk for SBI Rs. 18,988.48 Crores
PORTER’S FIVE FORCES FRAMEWORK ANALYSIS
To understand the various horizontal and vertical threats faced by the industry, porter five forces
framework has been applied to study the various issues faced by the sector.

1. THREAT OF NEW ENTRANTS - LOW – The entry barriers in the banking industry is
very high, as new banks need to gain the trust of people as well as comply with the rules
and regulations of the banking industry as set by RBI. The initial investment required by
banks is enormous as they have to maintain the capital adequacy ratios as set by the reserve

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 bank of the country and also maintain additional capital countercyclical buffer for adverse
conditions. The marketing investments will be huge, as they need to establish new
customer relationships. Strict regulations and taxation requirements make it challenging to
enter this segment and compete with SBI, which is far more deeply penetrated in the
country.

2. THREAT OF SUBSTITUTES – MEDIUM – financial institutions such as NBFC’s

substitutes as they provide an alternative way of borrowing and they provide competition
to banks in rural sectors. However, they are many other financial institutions, which offer
financing solutions to customers, but due to the large size of SBI, they possess only a mild
threat in comparison to SBI.

3. BARGAINING POWER OF CUSTOMERS - HIGH – The switching costs of

customers in the banking industry is meager. The majority of banks in INDIA provides the
vital services offered by SBI. The competition comes down to the effectiveness and speed
of services being provided, which is being leveraged accurately by the private banks due
to their strong sales force. SBI is not in a position to influence customers or raise its service
charges. Therefore the bargaining power of the customer is very high. Also due to the large
customer base as well as a large number of branches, the overhead costs are very high in
comparison to other banks.

4. BARGAINING POWER OF SUPPLIERS – LOW – the suppliers of SBI in terms of

tangible terms is very low because the suppliers of SBI will consist of stationery suppliers
and electronics (monitors, keyboards, etc.) who pose no threat because SBI is a bulk
purchaser and they can offer terms of employment to other suppliers in no meantime .
Besides, human resources (staff) is a supplier in case of SBI, and their negotiating power
is very less.

5. COMPETITIVE RIVALRY – HIGH – The competitors of SBI are HDFC, ICICI

BANK, YES BNAK, PNB, Citibank and many others. They offer savings rate and other
types of offers to attract customers. Also, private banks engage in cross-selling of products
and have an efficient sales force to acquire new customers. However, SBI has launched
new digital products keeping in mind the technological need of the hour and has
partnerships with many payments app to give the benefit of one place and one-step banking
at their mobile phones. The banking industry is not limited to just creating accounts or
granting loans; banks provide innovative solutions to customers and offer new products
suited to their needs. Customers want these services at the lowest rate, and hence the
competitive rivalry is very high in case of SBI.

ENVIRONMENT ANALYSIS OF THE INDIAN BANKING INDUSTRY (PESTEL

ANALYSIS)

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 PESTEL Analysis is used to understand the external environment factors that affect the
company or organization. The PESTEL analysis for SBI is as mentioned below
1. POLITICAL FACTORS
Since SBI is a government bank, Political factors play a significant role in the
industry analysis. Apart from India, SBI is operating in more than seven countries, and
every country has its political policies. The following are a few political factors to be
considered

 Political Stability and money center banks importance

 Trade regulations and financial tariffs
 The risk of military invasion by other countries may cause divestment from ventures.
 Trading partners
 A high level of taxation would create a problem for companies like State Bank of
India from maximizing their profits
 A minimum wage would mean higher profits and, hence, higher chances of survival
for State Bank of India

2. ECONOMIC ENVIRONMENT
The Macro environment factors such as inflation rate, savings rate, interest rate,
foreign exchange rate, and economic cycle determine the demand and aggregate
investment in an economy. State Bank Financial Corporation can use country’s economic
factor such as growth rate, inflation & industry’s economic indicators such as Money
Centre Banks industry growth rate. The following are factors to be considered
 The intervention of government in the free market and related Financial
 The GDP growth in the country will affect how fast State Bank of India is expected
to grow soon
 Economic growth rate
 Discretionary income
 Unemployment rate
 The forex rate of the country, State Bank of India operates in would impact the
profitability of State Bank of India
 Inflation rate
 Interest rates

3. SOCIAL FACTORS
Culture and way of processing things impact the style of an organization in an
environment. The beliefs and attitudes of the customers play a significant role in how
marketers at State Bank Financial Corporation will understand the customers of a given
market and how they design the marketing message for Money Centre Banks industry
consumers. The following are factors to be considered
 Demographics and skills of the population
 Class structure, hierarchy, and power structure in society
 Education background as well as standards in the State Bank Financial Corporation
’s industry
 Culture (gender roles, social conventions, etc.)

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  Entrepreneurship and the broader nature of society. Some societies encourage
entrepreneurship while some won’t
 Attitudes (health, environmental consciousness, etc.)
 Leisure interests

4. TECHNOLOGICAL FACTORS
Technology is one of the disrupting factors in the banking industry. A bank
should not only do technical analysis of the industry but also focus on the speed at which
technology disrupts the banking industry. Slow speed will give more time while the fast
pace of technological disruption may provide a little time to capture and be profitable.
Technology analysis involves understanding the following impacts
 The technological developments done by State Bank of India
 Technology's impact on product offering
 Impact on cost structure in the Money Center Banks industry
 Impact on value chain structure in the Financial sector
 Rate of technological diffusion

5. ENVIRONMENTAL FACTORS
Different markets have different policies or environmental standards, which
impacts the profitability of a firm in those markets. Even within a country, every state
can have different environmental laws and liability laws.
 Laws regulating environment pollution
 Air and water pollution regulations in the Money Center Banks industry
 Recycling
 Waste management in the Financial sector
 Attitudes toward “green” or ecological products
 Endangered species
 Attitudes toward and support for renewable energy

6. LEGAL FACTORS
The government institutions in a country, while political and thus subject to
whichever political party holds the majority in a government body, also considered in
legal factors. State Bank of India policies on their own are not enough to efficiently
protect State Bank of India and its workers, making State Bank of India appear an
undesirable place of employment that may repel skilled, talented workers
 Anti-trust law in the Money Center Banks industry and overall in the country
 Discrimination law
 Copyright, patents / Intellectual property law
 Consumer protection and e-commerce
 Employment law
 Health and safety law
 Data Protection

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 3. Internal Risk Factors

The internal determinants include management controllable factors such as liquidity,

investment in securities, investment in subsidiaries, loans, nonperforming loans, and overhead
expenditure. Other determinants such as savings, current account deposits, fixed deposits, total
capital and capital reserves, and money supply also play a major role in influencing the
profitability
Operational risk is the risk of possible adverse effects on the bank’s financial result and
capital caused by omissions (unintentional and intentional) in employees’ work, inadequate
internal procedures and processes, inadequate management of information and other systems,
as well as by unforeseeable external events. Operational risk also includes legal risk.
All banks (full service/others) face operational risks in their day to day BAUs across all their
departments including treasury, credit, investment, information technology.

There are three main causes of this risk:

 Human factors: Human Intervention & Error

 Technological factors: Failure of the IT/internal software & systems

 Physical factors: Failure of Internal Processes to transmit data & information accurately

1. Human-factor risk can include:

 Union strikes
 Dishonesty by employees
 Ineffective management or leadership
 Failure on the part of external producers or suppliers
 Delinquency or outright failure to pay on the part of clients and customers

Personnel issues may pose operational challenges. Staff who become ill or injured and, as a
result, are unable to work can decrease production. A company may need to hire or replace
personnel key to the company's success. Strikes can force a business to close.

2. Technological risk includes unforeseen changes in the manufacture, delivery or distribution

of a company's product or service.

For example, a technological risk that a business may face includes outdated operating systems
that decrease production ability or disruptions in supplies or inventory.

3. Physical risk is the loss of or damage to the assets of a company.

A company can reduce internal risks by hedging the exposure to these three risk types. For
example, companies can obtain credit insurance for their accounts receivable through
commercial insurers, providing protection against customers not paying their bills. Credit
insurance is usually very comprehensive and provides protection against debt default for a wide

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range of reasons, covering virtually every conceivable commercial or political reason for non-
payment.

1. The Efficiency of Bank Branches

2. Regulatory Impact and Efficiency – though common across bank, the most to lose out
due to some particular red tape, having that individual benefit
3. GAP Analysis - Gap analysis is used to measure a bank's exposure to interest rate
risk. Banks try to match the durations of their assets and liabilities. This way, when
a certain amount must be paid to a customer, the bank will have adequate cash on
hand and will not have to use valuable earnings assets to make the payment. As
interest rates move, the nature of the stream of payments changes. The degree to
which there is an imbalance between the durations of assets and liabilities will dictate
the magnitude of the effect this will have on the bank's financial results.
Industry Analysis -

Banking is a highly regulated industry, which makes it easier for you to evaluate each bank's
relative performance, and also the industry as a whole.

The risk of loss resulting from inadequate or failed internal processes, people and systems, or
from external events’. Operational risks encompass various segments of functioning of the
bank and it is faced by all organisations due to deviations from normal and planned functioning
of systems, procedures, technology and human failures of omission and commission.
Operational risk may also arise due to inherent faults in systems, procedures and technology
which adversely impact the earnings of an organisation.

Operational loss may also arise due to external reasons like frauds, forgery and malfeasance.
All the functional areas of a bank are exposed to operational risk and the Basel Committee has
recommended tools and approaches to quantify and allocate capital for the probable operational
loss. The banks are required to devise their own norms and procedures to identify the areas of
operational risk and controlling thereof.

4. Financial Risk Factors

After gathering information from balance sheet and income statement, following analysis were
done.

Balance Sheet Analysis:

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Profit and Loss Statement Analysis:

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 State Bank of India Profitability FY 2018 FY 2019
Returns
Return on Common Equity -2.04 0.99
Return on Assets -0.13 0.06
Return on Capital -0.60 0.50

Cash Flow Statement Analysis:

Analysis in Brief:

 SBI net interest income increased by 21% in 2018 to INR 748 billion, while its non-
interest income rose by almost 26% to INR 446 billion. The bank increased its share of
total assets (spiked 28% to INR 34 trillion) and investments (climbed 38% to INR 10.6
trillion).

 Though SBI grew operating profit by 17% to INR 595 billion, the bank posted a net
loss of INR 65 billion. The sharp fall from INR 104 billion in 2017 profits comes due
to higher provisioning requirements by the Indian government on the NPAs, followed
by stinging MTM losses (mark-to-market asset prices are adjusted daily to reflect
market prices) on SBI?s HFT (held for trading) and AFS (available for sale) portfolios.
New employee benefit provisions also negatively affected net income.

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  To meet capital needs, SBI divested an 8% stake on SBI Life insurance in 2018, valued
at INR 700 billion. (The bank owns several non-banking subsidiaries ranging from life
insurance and mutual funds to global securities market, and creating IPOs occasionally
shields it against windfalls like high NPA by raising easy capital.)

 ROA guidance of 1% for FY20 -- We believe SBI’s ROA has multiple levers going
into FY20 driven by improving margins (falling net NPLs), lower operating cost
(reduced staff expense and operating leverage) and higher other income from recoveries
on large NPL resolutions and subsidiary stake sell down. We believe SBI should return
to normalized profitability by 2020.

 Asset quality continues to show improvement. Stressed pool trends down as well:
Through FY19, SBI has shown a marked improvement in asset quality.

Other Financial Risk Determining Parameters

1. RSI – Relative Strength Index

 Developed by Welles Wilder

 Momentum Indicator/ Oscillator
 It measures the relative internal strength of the stock or index
 Measures the magnitude of recent gains versus recent losses
 Implication - RSI attempts to smooth out distortions

Formula = ( 100 – (100/(1+RS)))

where RS = 14-day EMA od upday closing gains / 14 day EMA od downday closing
losses

Indication
 Ranges from 0-100
 Below 30 – OVERSOLD
 Above 70 – OVERBOUGHT
 50 – above of below this level shows the strength of the trend
 SBI – RSI is 58.254

2. Moving Average Convergence Divergence (MACD)

 MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA)

from the 12-period EMA.
 A nine-day EMA of the MACD called the "signal line," is then plotted on top of the
MACD line, which can function as a trigger for buy and sell signals

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  Use of another 9 EMA to smoothened the trend and give an confirmation of trend
(Trigger Line)
 Implication - MACD helps investors understand whether the bullish or bearish
movement in the price is strengthening or weakening

Formula = 12 period EMA – 26 period EMA

Where EMA - Exponential Moving Average

 Indication
 SBI – MACD is 20.1
 Lunar Cycle (Tides, Moon, Water, Human Body) So 14 and 28 MA
 Use of EMA (Because more recent period are heavily weighted)
 MACD will plot the difference between STEMA and LTEMA

Risk Adjusted Returns V/s Sensex

Return – Beta
SBI – High beta Stock with 1.43 with Sensex.
High beta Stocks generally rise and fall by a larger proportion than market.

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 15.09 16.18 15.49
12.83
10.41 11.01
7.15

0.12 0.99
-2.04
FY FY FY FY FY FY FY FY FY FY
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

We think the bank’s core ROE will reflate from FY20 onward as the company crosses the
“hump” on provisions and NPL recognition over FY19. With the large part of credit costs and
operating costs behind it in FY19, SBI should start reverting to normalized profitability from
FY20 onward, in our view, and the bank should hit the target ROA of 0.9-1% over FY20-21

Summary:

In Millions of INR except Per

Share FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Tax Burden
Net Inc to Comn/Pre-Tax Profit
% 65.73 67.25 25.53 37.21 44.05
Adjustment Factor
Normlzd Net Inc/Net Inc to Cmn 1.00 1.00 1.13 — 1.01
Interest Burden

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 Operating Margin
EBIT/Revenue % 20.72 13.97 0.64 -8.07 2.98
Asset Turnover
Revenue/Avg Assets 0.10 0.09 0.09 0.08 0.09
Leverage Ratio
Avg Assets/Avg Equity 16.51 16.88 16.39 15.78 16.15
5 Year Average Adj ROE 13.28 12.07 8.85 5.35 3.46
Payout Ratio 15.58 16.51 874.08 — 0.00
Sustainable Growth Rate 9.29 5.97 -0.94 — 0.99

In Millions of INR FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Market
Capitalization 19,93,723.4 15,07,919.4 23,39,426.2 22,30,254.4 28,62,569.1
Book Value of Equity 16,13,875.4 18,05,923.7 21,71,921.5 23,03,219.5 23,44,956.6
Total Deposits 2,03,38,609.5 2,23,80,344.0 2,59,98,106.6 2,70,19,101.5 2,92,55,836.5
Total Loans 1,72,90,240.0 1,92,39,157.3 1,97,83,966.2 2,07,36,997.5 2,33,43,981.4
Total Assets 2,70,01,100.2 3,07,34,831.5 3,44,51,215.6 3,61,64,445.6 3,88,84,670.6

Net Revenue, Adj 12,48,252.2 13,01,138.7 14,78,476.3 15,17,781.2 17,54,582.6

Growth %, YoY 19.3 4.2 13.6 2.7 15.6
Prof Bef Prov, Adj 4,88,352.4 5,85,061.2 6,03,353.4 5,64,189.2 6,06,167.7
Margin % 39.1 45.0 40.8 37.2 34.5
Operating Income,
Adj 2,59,058.5 1,81,978.4 9,886.4 -1,22,141.8 52,528.4
Margin % 20.8 14.0 0.7 -8.0 3.0
Net Income, Adj 1,70,278.3 1,22,383.6 2,719.0 -45,347.8 23,222.9
Margin % 13.6 9.4 0.2 -3.0 1.3
EPS, Adj 22.80 15.97 0.35 -5.31 2.60
Tier 1 Common Eqty
% — 9.67 9.92 9.86 9.78

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Tier 1 Capital Ratio
% 9.49 9.87 10.41 10.53 10.78
Total Capital Ratio
% 12.00 12.92 13.03 12.72 12.83

Source: Bloomberg for all the financial data and annual report

Linking EIIF Evaluation to Credit Risk Grades and Limitations

This is more of a subjective and perspective-based exercise. We have tried to gauge each of
the EIIF (External, Industry, Internal and Financial) factors and tried to assimilate them
together to arrive at a rating for SBI.

Limitations faced: Only EIIF analysis has been done for the bank. There are other frameworks
and factors that can be used to determine the credit risk analysis of a company and those haven’t
been used here. All those factors should also be considered while replicating this exercise in
real life scenarios.

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