The increase in State Bank of India’s stand-alone operating profit for the September quarter, compared with the year-ago period, is due entirely to profits on sale of investments.
Here are the numbers—SBI’s stand-alone operating profit for the September quarter is Rs2,713.22 crore, compared with Rs2,112.53 crore in the year-ago period—a rise of Rs600.69 crore. However, SBI had created additional provisions over and above the norms of the Reserve Bank of India (RBI) for bad loans during the June quarter, which have been utilized during the September quarter. The net impact of that adjustment, say the notes to SBI’s accounts, was a rise of Rs200 crore in operating profit in the September quarter. In other words, after taking that adjustment into account, operating profits actually are up Rs400.49 crore year-over-year in the second quarter.
That’s an increase of 18.96%—not too bad. But here’s the rub—the bank’s profit on sale of investments was Rs434.68 crore during the September quarter, compared with Rs8.24 crore during the year-ago period, or a gain of Rs426.44 crore.
Put another way, the entire increase in SBI’s operating profit during the last quarter was on account of this profit on sale of investments. In its core banking operations, the lender’s operating profits were actually lower than in the year-ago period.
What’s more, this has happened despite SBI’s loan growth rate, at 26.21% year-on-year, which is higher than the banking sector’s credit growth of 23%. That growth was not enough, because net interest margins were under severe pressure and net interest income rose a mere 6.3% during the quarter. Interest expenses as a percentage of interest earned was as high as 67.6% during the September quarter, compared with 59.8% in the year-ago period and 62.1% in the June quarter.
That’s because the bank’s low-cost Casa (current and savings accounts) as a percentage of total deposits has been falling—from 41.06% in the first quarter to 39.45% in the second quarter. With the yield on advances not moving up by as much as the cost of deposits, net interest margins have been squeezed. In addition, the bank’s cost-to-income ratio continues to deteriorate.
Fee income growth was just 11.85%, but foreign exchange (forex) income showed extraordinary growth in the second quarter. Profit on sale of investments, which contributed the bulk of the increase in non-interest income, is a very volatile item and it’s debatable whether it is sustainable.
Apart from that, net profit growth was higher because provisions (other than tax) were much lower. That the bank’s provisions for bad loans is not adequate is seen from the fact that its cover went down to 45.15%, compared with 48.83% in Q1.
Net non-performing assets went up a tad—from 1.62% at the end of June to 1.63% by the end of September.
In short, SBI’s reported rise of 36% in net profits masks several weaknesses, not the least of which is the fact that the bank has not yet made provisions for employee benefits according to the revised AS-15 standard—a new accounting principle on which pension and gratuity would need to be calculated. The sooner the bank is able to raise capital, therefore, the better. That would not only give it additional funds to expand, but also paper over the cracks.
Lower interest rates
For the week ended 19 October, the RBI’s foreign exchange reserves increased by $4.457 billion (about Rs17,649.72 crore). In one month, forex reserves have gone up by $25.252 billion (Rs1 trillion) to $261.143 billion. Small wonder that finance minister P. Chidambaram has reiterated that the reason for tightening the screws on participatory notes (PNs) was to moderate inflows, while achieving greater transparency was merely a by-product. In other words, it’s the rupee that’s the main concern for policymakers at the moment. Chidambaram says he’ll wait to see how the PN controls have worked.
The implication is that if they don’t work, he’ll come back with other measures. That puts the markets in a bind. If the curbs work, then the pace of inflows will moderate, which means the upward momentum in the market also will moderate. And if the curbs don’t work, then the government will bring in other measures to limit inflows.
One of them, already being talked about, could be a limit on foreign direct investment (FDI) into real estate. That too will hurt the market, in the form of lower prices for realty stocks.
This market has been rising solely on the expectation of more liquidity driving it higher and higher, with smart money confident of getting out before the bubble bursts. Any attempt to control those flows will hit the market, either directly or indirectly. That said, if the US Fed cuts rates on 31 October, as it is expected to do, it will send another wave of money to our shores, making RBI’s job even more difficult. With the government determined to bring down capital inflows, what should RBI do?
At the moment, inflation as measured by the wholesale price index is low and the economy is doing well. But the overall picture conceals deep distress in several sectors hurt by the appreciating rupee, such as textiles and auto ancillaries and others that have been affected by high interest rates, such as small-scale industries and the auto sector. Some units are cutting back on shifts, while others are laying off contract workers.
Ideally, the central bank should help them by lowering interest rates. The problem there is that a rate cut will immediately boost the stock markets, leading to even greater inflows. RBI also may take the easy way out and do nothing. With the credit-deposit ratio around 70% and with the rate of growth of deposits passing loan growth, banks have lots of liquidity.
Several have already reduced their deposit and lending rates. The banks should be in a position to cut interest rates, without RBI’s signal.
At the moment, RBI may choose to focus on the rupee, leaving interest rates to find their own level.
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