SBI Subsidiaries Valued At Nearly Two-Thirds Of Bank’s Market Cap
SBI Cards & Payment Services Ltd., which opens its initial public offering next week, will become the latest from the State Bank of India stable to enter the public markets. SBI Cards will become the third group company, after SBI itself and SBI Life Insurance Co. Ltd. to become a public listed entity.
India’s largest lender has many more where those came from.
In total, SBI has nearly 40 non-bank subsidiaries, foreign bank subsidiaries, joint ventures and investments, according to the bank’s annual report for the year ended March 2019. The largest of these are SBI Mutual Fund, SBI Cards, SBI Life Insurance, SBI General Insurance and SBI Capital Markets.
According to internal estimates, the bank’s holding in its subsidiaries and joint ventures is valued at around Rs 1.9 lakh crore, said a senior bank official, who spoke on condition of anonymity. The initial investment made by the bank in these subsidiaries was only Rs 4,700 crore, this person said.
If SBI’s internal estimates are to be believed, valuation attached to the subsidiaries is nearly two-thirds of the valuation of Rs 2.9 lakh crore ascribed to the bank.
SBI, despite being India’s largest lender by a mile, trades at a valuation of 1.25 times price-to-book value, well below the 3.77 multiple commanded by HDFC Bank Ltd., the country’s largest private lender.
An official spokesperson for SBI didn’t respond to a query mailed on Wednesday.
Unlocking Value, One At A Time
The SBI Cards IPO, which will remain open till March 5, values the company at around Rs 70,000 crore at the upper end of the price band. Registered as a non-bank lender, which is in the credit card business, SBI Cards has a loan book of Rs 9,800 crore. It is the second-largest credit card issuer after HDFC Bank.
Prior to this, SBI listed its life insurance company in 2017, when the bank raised nearly Rs 5,500 crore by selling 8 percent stake in it. The business was then valued at Rs 70,000 crore. Its market cap stood at over Rs 89,000 crore as of Wednesday. SBI Life, together with HDFC Standard Life Insurance Co. Ltd. and ICICI Prudential Life Insurance Co. Ltd. is among the three leading private insurers.
SBI General Insurance, while not listed, was valued at close to Rs 13,000 crore in a recent transaction. In October 2019, SBI’s joint venture partner, Insurance Australia Group entered into an arrangement with Premji Invest and Warburg Pincus to sell its 26 percent stake for about Rs 3,400 crore. The bank isn’t considering listing its general insurance venture for now, the SBI official cited earlier said.
The other two businesses where SBI could consider a public listing or stake sale are the asset management and investment banking units.
SBI Mutual Fund, which has assets under management worth Rs 10 lakh crore, could be the next one to list. Its Chief Executive Officer Ashwani Bhatia told The Economic Times in a recent interview that the asset manager could consider listing in the next 15-18 months. BloombergQuint couldn’t independently confirm this.
In the case of SBI Capital Markets, the investment banking arm of SBI, the lender has publicly said that it intends to restructure business. In May 2018, SBI Chairman Rajnish Kumar had indicated that the bank may consider bringing in an investor into the unit. However, no proposal has been finalised so far.
One has to give the bank full credit for supporting its subsidiaries, said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services. “For example, if you look at a company like SBI Capital, which isn’t usually very exciting from a valuation point of view, you will see that compared with some other bank-owned investment advisers, they are quite strong,” Parekh said.
What It Means For SBI’s Valuation
According to analysts, as SBI lists some of its larger subsidiaries, the sum-of-parts valuation should rise.
The listing of SBI Cards alone could lead to analysts raising their target price for the bank. In a note dated Feb.12, Suresh Ganapathy, analyst at Macquarie Capital Securities, said that if SBI Cards gets a valuation of about Rs 60,000 crore, it translates to Rs 47 per share of SBI. “If value unlocking happens at this price, it would add Rs 16 (~5 percent) to our target price of Rs 320.”
Siddharth Purohit, banking analyst at SMC Global Securities, agreed.
Also Read: SBI Cards IPO: Is The Frenzy Justified?
“When you’re looking to derive value for the bank, it would be prudent to let your successful subsidiaries be listed and get a market established capitalisation. That way, the sum-of-the-parts value for the consolidated operations improves and is no longer dependent on subjective assessment of the underlying business,” said Purohit.
In addition, the bank can also easily unlock capital via such listings and stake sales and put it to use for the bank’s own expansion plans, he said.