The Reserve Bank of India (RBI), in a notification dated 7 April 2022, had issued guidelines on establishment of digital bank units (DBUs). In this notification the central bank had outlined the accounting treatment for DBUs, which read as follows: “A digital banking segment, for the purpose of disclosure under Accounting Standard 17 (AS-17), is a sub-segment of the existing ‘retail banking’ segment, which will now be sub-divided into (i) digital banking and (ii) other retail banking. The business involving digital banking products acquired by DBUs or existing digital banking products would qualify to be clubbed under this segment.” In simple terms, retail banking segment has been split into two segments – digital banking and other retail banking.
Three accounting years (2022-23, 2023-24 and 2024-25) have passed since this notification. During these three financial years, the performance of State Bank of India on this count (DBUs) has been extra-ordinary. In all these three financial years, the rate at which profits of digital banking have been going up was higher than the revenues earned. For example, for the latest financial year (2024-25), profits have increased by 99 per cent, while the revenue has gone up by only 48 per cent.
In 2023-24, profits from DBUs stood at Rs7,686 crore, as against profits from treasury, which were Rs16,187 crore. And, for 2024-25, digital banking had profits of Rs15,290 crore, while treasury profits were Rs17,585 crore. It has to borne in mind that there were no exceptional items. In other words, there are no windfall gains.
Funding centre
In the latest annual report (2024-25) of SBI, in the notes to the accounts, it is stated that, “The retail banking segment is the primary resource-mobilising unit. The corporate/wholesale banking and treasury segments are recipient of funds from retail banking. Market-related funds transfer pricing (MRFTP) is followed, under which a separate unit called ‘funding centre’ has been created, which notionally buys funds that the business units raise in the form of deposits or borrowings and notionally sells funds to business units engaged in creating assets.” Does this in any way explain how profits can exceed revenues?
Contrast this with the performance of HDFC Bank. The digital banking unit’s revenues are still in single digit. For 2022-23 and 2023-24, this segment posted minor losses. For 2024-25, it recorded a profit of R4 lakh.
While SBI might have beaten HDFC Bank on DBUs, has this performance increased its valuation? Today, HDFC Bank is the second most valuable company (behind Reliance Industries), with a market cap of Rs1,539,244 crore, while the market cap of SBI is Rs718,030 crore – less than half of HDFC Bank. ICICI Bank, with a market cap of Rs1,040,290 crore, is ahead of SBI.
Tall in numbers, short in valuation?