State Bank of India's consolidated first-quarter 2016 earnings were up a modest 6%, primarily led by net interest income growth of 6% as the bank continued to face slower loan growth (up 7%) than the system. System loan growth is currently skewed towards retail loans, unfavorable for this wholesale corporate lender which derives only 21% of its loans from the retail segment (up 16%), the majority of which tend to be home loans which grew 13%. Yield on advances fell by 17 basis points, while cost of deposits remained almost flat, thereby pressuring net interest margins by 14 basis points to 2.99% for the consolidated bank. While the standalone bank's earnings grew 10%, profit declines in State Bank of India's other subsidiaries brought down consolidated net profit growth to 6%.
State Bank of India's market share in system loans fell by 64 basis points, but grew ahead of the market in deposits which were up 12%. The "banker to every Indian" as its slogan suggests was the bank of choice as savers looked to lock in a higher term-deposit rate in a falling interest rate environment. Its ever-expanding branch network, of 16,377 branches as of June 2015, attempts to reach every corner of the country, unlike most other banks which tend to build for local scale in high-density areas. As a result, the standalone bank's operating cost-to-income ratio increased by 130 basis points to 51%, however, its consolidated cost-to-income for the quarter fell below our 60% estimate for 2016 as consolidated non-interest expenses decreased 8%. Management guides to improved cost to income for the year as it takes several initiatives, such as central procurement for operational needs of its branches, to reduce operating costs.
While earnings growth was much behind our 17% five-year annual growth forecast, we remain hopeful State Bank of India will get back on track as economic activity, particularly in the corporate sector, picks up. Shares of this narrow-moat stock remain fairly valued.
On the loan book side, there were no surprises as the bank continued to make higher provisions for its infrastructure-based loans (similar to other banking peers) as the sector continues to face regulatory roadblocks and supply-side constraints.
