SBI Life stands on a strong foothold for superior to industry growth, driven by a geographically diverse retail-dominated business mix and exclusive access to SBI’s >22k branches. Its best-in-class cost ratios are driven by the lower costs of SBIN-sourced business (~10%, v/s >20% for IPRU & HDFCLIFE). Our calculation suggests that a tax-assumption change (similar to what IPRU & HDFCLIFE follow) would boost VNB margins by ~150bp over reported. Buy, price target Rs 804.
Comparable VNB margins are ~17-18%: Reported VNB margins in FY18 were 16.3%. The comparison with 23.2% and 16.5% for HDFC Life and IPRU Life is skewed because of differences in underlying tax rate assumptions. Unlike the other two, SBI Life has not taken the benefit of a lower effective tax rate in its EV or VNB margin calculation, which flows to its overall profitability through experience variance in the year business unwinds. We calculate that, on a like-to-like basis, SBI Life’s margins would be close to 17-18% (~150bp higher than reported).
Best-in-class cost ratios: SBI Life operates at one of the lowest cost ratios within private players (4.4% commission rate & 6.8% opex/premium for FY18). Distribution expense (commissions + opex) for SBIN sourced business is only ~10% v/s more than 20% for ICICIBC & HDFCB . Is it sustainable? In the near to medium term, we believe it is: (i) SBIN gains through value creation from its ~62% stake in SBI Life; (ii) exclusivity of bancassurance partnership. That said, this structure is an anomaly that, when normalised, poses a risk to margins.
Granular & broad-based customer mix: SBI Life’s retail business franchise is geographically the most well diversified among its private peers. The contribution of the top 3 states in total retail business stands at only~25% for SBI Life, compared to ~55% for HDFC life and ~40% for IPRU Life. Having a broad-based franchise not only supports stronger growth, but also ensures lesser concentration risk and better persistency in cyclical downturns.
Strong distribution and brand franchise: Access to >22k SBI bank branches, an agency channel with best-in-industry productivity (~Rs 260k retail business per agent) and strong brand recall from its pseudo-sovereign identity gives SBI Life unique competitive advantage over private peers. Its banca-branch productivity (retail NBP/ branch) at ~Rs 2.4 million has nearly tripled since FY15, but is far lower than IPRU Life (~Rs 8.4 million) and HDFC Life (~Rs 5.5 million) due to fewer active SBI branches. With levers to improving productivity, we expect strong individual NBP growth to sustain (25% built for FY18-21 v/s 31% growth for FY15-18).