M&A – Section 2

Rydham Goyal
2023PGP236
Company Name – State Bank of India
9/11/2024

1. Industry Analysis and regulatory framework, Peer Group Analysis, Competitor

Analysis. [3]

State Bank of India operates in a dynamic, highly competitive banking environment with
rapid technological developments, changes in regulation, and shifting expectations from
customers. The following is a very detailed industry analysis based on the latest annual
report regarding SBI's market position, its competitive landscape, strategic initiatives,
challenges, and future outlook.

1. Market Overview

The Indian banking sector has been expanding over the years and, with the total assets
expected to reach nearly ₹200 lakh crore by 2025, the economy can best be visualized
through this. Increased financial inclusion, increased disposable incomes, and a
burgeoning middle class have all played their roles in this. The sector is now also
witnessing a trend towards digital banking because the consumers increasingly prefer
online transactions more than traditional modes.
The RBI banking sector regulates and engages actively in reform to boost the level of
transparency, financial stability, and promoting competition. Today, the Reserve Bank of
India concentrates on increasing infrastructure in banks with consumer protection.

2. Position in SBI

SBI is the largest public sector bank of India with a total asset size of ₹61.79 lakh crore
and a deposit base of ₹49.16 lakh crore as of FY2024. This position gives SBI more
economies of scale and leads to staying ahead in most banking segments.
Diversified product: SBI has a diversified product mix, including personal banking,
corporate banking, rural banking, international banking, and government business
solutions. This will make it less prone to economic shocks and shifts in consumer
preferences.

3. Competitive Landscape

Competitors: The key competitors for SBI include public sector banks such as Punjab
National Bank and Bank of Baroda, and private sector banks like HDFC Bank and ICICI
Bank. Each competitor has its product with certain customer segments in mind, thus
increasing the intensity in competition.
Technological Innovation: Technology innovation is growing increasingly dominant in
the landscape. Banks are spending heavily on digital solutions to enhance customer
experience and operational efficiency. SBI's YONO has been a great example of the
commitment toward digital transformation, with more than 7.40 crore users now
accessing hassle-free banking experiences.
4. Strategic Plans

Digital Transformation: SBI has recognized digital transformation to be the overall

strategy towards good service delivery and customer engagement. The bank introduced
the YONO application, through which multiple banking services can be accessed in one
place, like loans, investments, and everyday bank services.
SBI believes that sustainable banking practices are crucial for financing green projects
and responsible lending. The bank defines definite targets at defined intervals to enhance
the Renewable Energy Finance portfolio and carbon footprint reduction through energy-
efficient practices.

Financial Inclusion Schemes: The bank is highly focusing on financial inclusion through
better reach of the underprivileged sections across more and more branches through
improved branch networks and microfinance schemes. Loans to small-scale farmers and
women entrepreneurs are in line with the national aspirations toward achieving economic
development.

5. Issues

NPAs: Like any other Indian bank, NPAs stand out as the biggest challenge for SBI.
Though the net NPA ratio has been stabilized at 0.57% as of FY2024, overall economic
uncertainty seems to be looming large on asset quality.
Regulatory Compliance: Adhering to evolving regulatory requirements can be
challenging for large institutions like SBI. Continuous monitoring and adaptation are
necessary to maintain compliance while ensuring operational efficiency.

6. Future Outlook

With the backdrop of appropriate market positioning, a diversified portfolio, and a

commitment to innovation, there are positive growth prospects in SBI. Further, it could
strengthen its capabilities of doing more on the digital front while expanding into new
markets across emerging economies.

The regulatory framework for the banking industry in India, focusing on the State Bank
of India, is complex and driven by laws, guidelines, and policies. It provides for a stable,
transparent, and accountable banking system. This section details the analysis of the
regulatory environment affecting SBI:

State Bank of India (SBI) Regulatory Framework

1. Main Regulatory Bodies

Reserve Bank of India (RBI): RBI is the central bank of India along with also being a
primary regulatory authority for banks. It formulates monetary policy; it regulates
currency; and it supervises the entire banking sector as well. RBI provides directions on
capital adequacy, asset classification, provisioning norms, and corporate governance.

This is a government organization with great significance in formulating policies related

to the financial sector, including public sector banks like SBI. They take care of all these
banks in terms of financial health as well as operational efficacy.
2. Executive Orders
The Basel Norms: SBI follows the global norms of Basel III, which consists of norms on
bank capital adequacy, stress testing, and market liquidity risk. The Basel Norms are
focused on making the banking sector more resilient to financial shocks. Hence, in
FY2024, SBI reports TCR at 14.28%.

Asset Classification and Provisioning: RBI has specified a classification of assets in the
books of its banks. The assets are classified under four major heads-standard, sub-
standard, doubtful, and loss-and are followed by SBI for proper management of NPAs.

Liquidity Coverage Ratio: The minimum LCR maintained by SBI is as per Basel III
requirements to ensure it had adequate liquid assets to meet its short-term liabilities.

3. Corporate Governance

Board Composition: SBI's governance structure includes a board of directors that

oversees the management practices and has checked for compliance with regulatory
standards, etc. Independent directors compose this board to provide oversight and
guidance.

A risk management framework: SBI is equipped with an evolved risk management

framework that identifies, assesses, and minimizes risks associated with its operations.
SBI has regular audit and checks at an appropriate level to satisfy regulatory compliance.

4. Control on Consumers

Fair Practices Code: The RBI has prescribed the Fair Practices Code that is being
followed by the SBI while dealing with customers. This code mentions a commitment by
the bank to fair and transparent lending practices and customer services.
Grievance Redressal Mechanism Banking has well-designed mechanisms to deal with
customer complaints and grievances with promptness, and that includes dedicated
customer service channels as well as escalation procedures.

5. Financial Inclusion Policies

Priority Sector Lending: the bank should lend minimum percentage of the total lending to
priority sectors like agriculture, micro and small enterprise, and housing for the
economically weaker sections. This is also an aiding support to the government's effort
towards poverty eradication through economic empowerment.

Digital Initiatives: RBI nudges the banks to embrace digital technologies in order to make
banking services accessible and efficient. SBI has walked the extra mile to digitize
banking by launching YONO, the digital banking platform.

6. Compliance with Anti-Money Laundering (AML) Standards

Know Your Customer: The bank strictly follows strict norms of know your customer for
the AML compliance. Here, the customer's identities are verified before providing any
banking services to avoid any frauds or illegal activities.
Transaction Monitoring: The bank is using the most advanced technology to monitor all
transactions to trace suspicious activities that could imply money laundering or even
financing of terrorism.

7. Effects of Recent Legislations

Banking Regulation Act: This Act has also amendments, which affect governance
structure of banks, and includes the provision of merger and acquisition in public sector
banks.

Digital Banking Guidelines: Recent RBI guidelines on digital banking have prompted
SBI to enhance its digital offerings while ensuring cybersecurity measures are in place to
protect customer data.

8. Future Regulatory Trends

A sustainable focus may result in the regulation of the environmental risk management in
banking operations since most of the world is now changing towards more
environmentally conscious finance.

Technological Adaptation: With fintech companies challenging the traditional banking

model, the regulators may come up with frameworks that promote innovation but ensure
consumer protection.

Public Sector Banks

1. Punjab National Bank (PNB)

PNB is one of the largest PSBs in India but has faced challenges related to NPAs and
governance issues in recent years. It has a significant presence in northern India and is
focusing on improving asset quality and customer service.

2. Bank of Baroda (BoB)

BoB is known for its international presence and diverse product offerings. The bank has
been working on enhancing its digital banking capabilities to compete with private sector
banks.

3. Canara Bank

Canara Bank boasts a robust branch network and has made strides in digital banking. The
bank is focusing on improving operational efficiency and customer service to enhance
profitability.
Private Sector Banks

1. HDFC Bank

HDFC Bank is recognized for its strong customer service and digital banking capabilities.
It consistently reports high profitability metrics and maintains a strong capital adequacy
ratio.

2. ICICI Bank

ICICI Bank has invested heavily in technology and innovation to enhance customer
experience. It has a diverse range of financial products catering to both retail and
corporate clients.

3. Axis Bank

Axis Bank focuses on retail banking and has implemented various digital initiatives to
improve customer engagement. The bank aims to enhance its market share through
innovative products and services.

Strategic Insights

 SBI's Strengths: SBI's vast branch network and strong brand recognition provide it
with a competitive advantage in reaching diverse customer segments across urban and
rural areas.
 Digital Transformation: While SBI leads in terms of user base on its digital platform
YONO, private banks like HDFC and ICICI are also advancing rapidly in digital
banking solutions.
 Asset Quality Management: SBI's focus on reducing NPAs is crucial given the
competitive pressure from private banks that have managed to maintain lower NPA
ratios.
 Growth Opportunities: All banks face opportunities in expanding their digital
services and financial inclusion initiatives, particularly in underserved regions.

2. Trend Analysis/ Historical Financial Analysis (Ratios- Performance, Activity,

Leverage, Liquidity, Dupont ratios etc), key financial and technical performance
metrics, financial trend. [5]

Sol. –

Name Company Industry

P/E Ratio TTM 10.87 23.33298
Price to Sales TTM 2.117813 10.06168
Price to Cash Flow MRQ -1.4758213 -0.72005
Price to Book MRQ 1.601239 2.95595
Price to Tangible Book MRQ 1.601239 2.96113
Gross Margin 5YA 0% 28.24%
Operating margin TTM 29.99% 43.72%
Operating margin 5YA 21.34% 40.96%
 Pretax margin TTM 28.29% 45.19%
Pretax margin 5YA 21.51% 40.90%
Net Profit margin TTM 20.45% 35.25%
Net Profit margin 5YA 16.66% 28.85%
Revenue/Share TTM 381.138058 255.64432
Basic EPS ANN 75.16816 70.68577
Diluted EPS ANN 75.16816 70.33625
Book Value/Share MRQ 491.962645 474.80817
Tangible Book Value/Share MRQ 491.962645 471.46355
Cash/Share MRQ 339.890252 140.75784
Cash Flow/Share TTM -546.93572 -345.0353
Return on Equity TTM 16.65% 16.34%
Return on Equity 5YA 12.74% 12.45%
Return on Assets TTM 1.10% 1.01%
Return on Assets 5YA 0.78% 1.76%
Return on Investment 5YA 0% 5.14%
EPS(MRQ) vs Qtr. 1 Yr. MRQ 15.36% 18.94%
Ago
EPS(TTM) vs TTM 1 Yr. TTM 4.03% 22.93%
Ago
5 Year EPS Growth 5YA 96.33% 28.50%
Sales (MRQ) vs Qtr. 1 Yr. MRQ 6.78% 34.76%
Ago
Sales (TTM) vs TTM 1 Yr. TTM 15.04% 37.23%
Ago
5 Year Sales Growth 5YA 22.65% 22.36%
LT Debt to Equity MRQ 137.61% 176.82%
Revenue/Employee TTM 14.2362301 457.73884
Net Income/Employee TTM 2.91072322 156.1091
Dividend Yield ANN 1.74% 1.15%
Dividend Yield 5 Year Avg. 5YA 1.15% 1.01%
Dividend Growth Rate ANN 21.24% 37.72%
Payout Ratio TTM 15.03% 1.13%

1. Performance Ratios

These ratios measure how well the company is performing in terms of profitability and
revenue generation relative to its stock price or cash flows.

 P/E Ratio (TTM): 10.87 (Company) vs. 23.33 (Industry)

Interpretation: The P/E ratio for the company is significantly lower than the industry
average. A lower P/E ratio can suggest that the stock is undervalued or that investors have
lower expectations for future growth. This could indicate either a buying opportunity or
perceived risks in the company's future earnings potential.
  Price to Sales (TTM): 2.12 (Company) vs. 10.06 (Industry)

Interpretation: The company’s Price to Sales ratio is much lower than the industry,
which can be a sign that the company generates higher revenue relative to its stock price
compared to its peers. This is often seen as positive, as it implies a more favorable
revenue valuation.

 Price to Cash Flow (MRQ): -1.48 (Company) vs. -0.72 (Industry)

Interpretation: Both the company and industry show negative values, which indicate that
cash outflows exceed inflows, possibly due to high reinvestment or operational costs. The
company's more negative ratio suggests more significant cash flow challenges compared
to the industry.

2. Leverage Ratios

Leverage ratios evaluate the company's financial structure, particularly the use of debt.

 Price to Book (MRQ): 1.60 (Company) vs. 2.96 (Industry)

Interpretation: The Price to Book ratio being significantly lower than the industry
average suggests that the company’s market valuation is close to its book value. This
could indicate that the market views the company's assets conservatively, or it may imply
an undervaluation by investors. A lower Price to Book ratio is often appealing to value
investors looking for undervalued assets.

Based on the ratios above:

1. Valuation and Performance: The company's lower P/E, Price to Sales, and Price to
Book ratios suggest that it may be undervalued relative to the industry. Investors may
perceive less growth potential, or there may be a general lack of market interest.
However, these metrics could also indicate a value opportunity if the company's
fundamentals are strong.
2. Cash Flow Challenges: The negative Price to Cash Flow ratio suggests potential cash
flow management challenges. This may require attention to operational efficiency or
strategies to improve cash inflows.
3. Leverage and Book Value: A relatively low Price to Book ratio might indicate
undervaluation, but it could also reflect conservative asset valuations. If this company
operates in a capital-intensive industry, it may be well-positioned to leverage these
assets if demand rises.
4. Liquidity and Efficiency: The lack of liquidity and activity ratios for the company
makes it difficult to assess its short-term financial health and efficiency in asset
management. However, the industry standards suggest moderate liquidity and very
low asset turnover.

3. Corporate Restructuring undergone since incorporation [merger, takeover,

acquisitions, Demerger. (spin off, carve out, spin off…etc)] [2]
Sol. – The State Bank of India (SBI), India’s largest public sector bank, has undergone
significant corporate restructuring since its inception. This restructuring has played a
critical role in enhancing the bank's market position, expanding its asset base, and
improving its operational efficiency. The restructuring has primarily involved mergers,
acquisitions, demergers, and strategic spin-offs. Below is a detailed overview of SBI's
corporate restructuring activities, including its mergers, acquisitions, demergers, and
other restructuring efforts.

1. Historical Context of SBI

The State Bank of India was established in 1955 following the nationalization of the
Imperial Bank of India. The goal was to create a powerful banking institution that would
serve as a backbone to India's economic development. The Indian government played a
key role in the establishment of SBI, aiming to bring about financial inclusion and
support the country’s industrialization efforts.

2. Mergers

SBI has undertaken several strategic mergers, with the most significant being the merger
with its associate banks. These mergers were intended to consolidate the bank's position
in the market and enhance its competitive strength.

 Merger with Associate Banks (2017):

Date: April 1, 2017.

Details: In one of the most significant mergers in the banking sector, SBI merged with
five of its associate banks, marking a major restructuring move aimed at improving
operational efficiency and strengthening the bank’s capital base.

 State Bank of Bikaner & Jaipur (SBBJ)

 State Bank of Hyderabad (SBH)
 State Bank of Mysore (SBM)
 State Bank of Patiala (SBP)
 State Bank of Travancore (SBT)

Outcome: The merger expanded SBI’s asset base, allowing it to become the largest bank
in India. By FY2024, SBI’s total assets exceeded ₹61 lakh crore, significantly increasing
its market share. The merger also enhanced the bank’s operational synergies, reduced
costs, and improved customer service capabilities.

3. Acquisitions

 Acquisition of Local Banks: SBI has actively acquired smaller regional banks over
the years, which has enabled the bank to diversify its customer base and strengthen its
footprint in both urban and rural areas.
 International Expansion: SBI has also sought to expand its global presence,
acquiring stakes in foreign banks and establishing branches in key international
markets. This includes catering to the needs of Indian expatriates and local businesses.
 Key Example: SBI’s acquisition of stakes in several banks in regions such as the
Middle East, Southeast Asia, and Europe has helped diversify its revenue streams and
increase its cross-border trade financing services.

 SBI Cards:

Formation: SBI Cards was formed as a joint venture with GE Capital in 1998. It
became a fully owned subsidiary of SBI.

Public Offering: In 2020, SBI Cards went public with an initial public offering
(IPO). This move allowed SBI Cards to raise significant capital while leveraging the
vast customer base of SBI for further growth in the credit card market.

Growth: Over the years, SBI Cards has grown significantly, making it one of the
largest credit card issuers in India, with substantial market share and robust customer
engagement.

3. Demerger Initiatives

 Demerger of Non-Banking Financial Services: SBI has made significant efforts to

demerge certain non-banking financial services into separate entities, allowing for
specialized management and more focused growth strategies in different sectors.

 SBI Life Insurance:

o Formation: SBI Life Insurance was established as a joint venture between
SBI and BNP Paribas Cardif in 2001. Over time, it became a public
company, which allowed it to attract additional capital and focus on expanding
its life insurance services.
o Growth: SBI Life has grown significantly since its IPO, becoming one of the
leading players in India’s life insurance market. This demerger helped SBI
sharpen its focus on its core banking business while allowing SBI Life to
attract more investor attention.

 SBI General Insurance:

o Formation: Like SBI Life, SBI General Insurance was also set up as a
subsidiary to offer general insurance products such as health, vehicle, and
property insurance.
o Focus: This restructuring allowed SBI to streamline its banking operations and
specialize in risk management and insurance while meeting the evolving needs
of the Indian insurance market.

4. Spin-offs and Carve-outs

SBI has implemented strategic spin-offs to optimize its portfolio and enhance operational
focus.
  SBI Mutual Fund:
o Formation: SBI Mutual Fund was launched as a subsidiary to manage mutual
fund investments, offering a wide range of investment products.
o Strategic Advantage: This spin-off allowed the mutual fund arm to grow
independently, leveraging SBI’s strong distribution network while focusing on
asset management.
o Growth: SBI Mutual Fund has become one of the leading mutual fund houses
in India, benefiting from SBI’s vast customer base and strong financial
standing.

 Focus on Digital Transformation: While not a traditional merger, acquisition, or

demerger, SBI’s digital transformation initiatives have been akin to a strategic
carve-out from its traditional banking model. With the launch of YONO (You Only
Need One), a mobile banking platform, SBI has effectively embraced the digital age.
o YONO Platform: YONO allows customers to access a range of banking,
financial, and lifestyle services through a single platform, combining banking
and fintech services in a seamless experience.
o Strategic Shift: This initiative marks a major shift in SBI's business model,
moving from conventional banking to integrated digital services.

4. GE- Mckinsey Matrix / ADL matrix [3]

Sol. –

SBU Market Competiti Explanation Strategic

Attractivene ve Recommendation
ss Strength

Retail High High Market Growth: Invest/Grow

Banking Increasing demand for Focus on
loans, mortgages, and expanding
digital banking. personal banking
Profit Potential: High, services and
due to large customer digital initiatives
base and cross-selling to retain market
potential. share and enhance
Regulatory Impact: customer
Compliance experience.
requirements align with
SBI's strength in
financial inclusion.
Competitive Edge:
Extensive branch
network, strong brand
loyalty, and digital reach
via YONO.
Corporate Moderate High Market Growth: Selective
Banking Stable, but affected by Investment
economic cycles and Continue focusing
risk of NPAs in specific on profitable
sectors. corporate
Profit Potential: segments while
Moderate, with high minimizing
asset values but lower exposure to high-
yields. risk sectors. Invest
Competitive Edge: in digital solutions
SBI’s scale, government to improve
backing, and established customer service
corporate relationships and reduce costs.
make it competitive
against private peers in
this segment.
Digital High Medium- Market Growth: Invest/Grow
Banking & High Rapidly expanding as Increase
Fintech digital services become investment in
essential. technology,
Profit Potential: High, especially in
as customers cybersecurity, user
increasingly prefer experience, and
digital over physical advanced
banking. analytics, to keep
Competitive Edge: pace with
YONO offers a evolving digital
competitive digital trends and
platform, but faces customer
strong competition from expectations.
private banks and
fintech.
Rural & Moderate High Market Growth: Maintain
Priority Stable, regulated growth Position
Sector due to mandated priority Focus on meeting
Lending sector lending. regulatory targets
Profit Potential: efficiently, while
Limited profitability due exploring digital
to regulatory controls, channels to reduce
but aligns with SBI's operational costs
role in financial in rural lending.
inclusion. Maintain current
Competitive Edge: market share.
Largest network in rural
areas provides a natural
advantage over private
players.
Internation Low- Medium Market Growth: Selective
al Banking Moderate Modest, especially for Investment
public sector banks Focus on
facing global profitable and
competition. stable
Profit Potential: international
Moderate, with certain markets. Optimize
regions offering niche operations and
opportunities but consider exit
generally lower margins strategies in low-
compared to domestic performing
operations. regions.
Competitive Edge:
Limited compared to
multinational banks,
though SBI has strategic
presence in key regions.

5. Highlights of Business Responsibility and Sustainability Report (BRSR) ….if any

[2]

Sol. –

State Bank of India's Business Responsibility and Sustainability Report provides a

comprehensive outlook on the work carried out by this bank in respect of responsible
business practices. Some of the key high-points based on the latest annual report are as
follows:

1. Commitment to Sustainability

Consolidation with ESG Principles: SBI maintains a commitment to incorporate ESG

principles into its business strategy. This commitment means the desire of the bank to try
to find the balance between profitability and social responsibility so as to generate value
in the long term for the stakeholders.
Alignment to SDGs: The bank is aligned to the United Nations SDGs, identifies, and
focuses on some crucial areas like poverty eradication, gender parity, and climate action
contributing towards global sustainability efforts.

2. Environmental Programs

Green Financing: SBI has enhanced financing for renewable energy projects, that include
investments in solar and wind ventures. It is planning a route map to enhance its green
financing portfolio so that it can support sustainable energy development in India.

Carbon Footprint Reduction: SBI has aggressive reduction targets for its carbon footprint
through energy efficiency in its branches and offices. This will be mainly achieved
through renewable sources of energy and digital banking solutions that reduce paper
usage.
The bank espouses responsible waste management through encouragement on recycling
initiatives and the reduction of plastics in its operations. This extends even to encouraging
the sustainable use in each employee and customer.
3. Social Responsibility

Corporate Social Responsibility: SBI is an active participant in CSR through education,

health, and community development. "The bank has funded several projects meant to
upgrade educational infrastructure and the healthcare services towards disadvantaged
communities".

Financial Inclusion Efforts: It promotes financial education and inclusion through

targeted programs for the excluded sections of the population in banking, thereby
financing women entrepreneurs or supporting SHGs.

Community Engagement: SBI engages with local organizations to identify community

needs and develop impactful projects. The strategy also includes the distribution of
wheelchairs to persons with disabilities and sewing machines to poor women.

4. Governance Practices

Corporate Governance Standards: SBI has higher corporate governance standards,

thereby providing such a transparent and accountable corporate framework for all other
operations. The governance framework includes checking for regular audits, compliance
checks, and ethical guidelines that govern the decision-making processes.

A strong risk management framework There is a proper framework of risk management

that detects, assesses, and controls risks related to banking operations. This includes strict
compliance with regulatory requirements for protection of the interest of various
stakeholders.

5. Stakeholder Engagement

Regular communication with stakeholders: This includes customers, employees,

investors, and communities, which is maintained through various feedback mechanisms
to gauge satisfaction and expectations.

Investment in employee training programs or sustainability practices and corporate ethics

in behalf of a bank makes the employees feel responsible, hence improving the
performance of an organization.

6. Performance Metrics

Monitoring Progress-The BRSR identifies quite a few KPIs of tracking the effectiveness
of sustainability initiatives. These metrics include carbon emissions reductions, growth in
portfolios of green financing, and improvement in community welfare indicators.

Annual reporting: SBI promises to report every year about its sustainability performance,
thereby ensuring transparency of the progress going toward these goals.
7. Future Objective

Implementation of green banking: SBI will look forward to developing more of green
banking initiatives through better investment in sustainable project achievement and
improvement in digital banking solutions leading to a reduction in environmental impact.

Emphasis to be laid on Digitization: Technological use to make more efficient use of the
service delivered with least resource consumption, in fact having better mobile banking
capability and encouraging more electronic transactions than the traditional ones.

Long-Term Vision for Sustainability: SBI aims at being a sustainable banking leader by
keeping itself updated with the ever-changing environmental challenges and also
sustaining economics.