Mumbai: State Bank of India (SBI) on Wednesday surprised the Street by posting a 12.36% increase in its second quarter net profit, but its stock fell sharply following a rise in bad assets.
The nation’s largest lender recorded a net profit of Rs2,810 crore for the quarter against Rs2,501 crore a year ago. Analysts polled by Bloomberg were expecting profit to remain flat at Rs2,520 crore.
The better-than-expected net profit was, however, marred by the high level of stressed assets and provisioning to keep them under check. The bank’s total bad debts as a percentage of its total advances, or gross non-performing assets (NPAs) ratio, stood at 4.19% against 3.35% a year ago. After setting aside money, the net NPA ratio was brought down to 2.04% against 1.7% in the year-ago quarter. This level of both gross and net NPAs was last seen in September 2005.
SBI shares dropped 6.76% to close at Rs1,862.50, while the Bankex, BSE’s banking index, dropped 2.62%. The exchange’s benchmark index, the Sensex, lost 1.18%.
The bank made a total provision of Rs4,664 crore in the quarter, higher by 20.96% from its year-ago quarter level of Rs3,856 crore. Among this, loan loss provision alone rose by 35.09% to Rs2,921 crore in the quarter. But on a sequential basis, total provision actually fell 17% and loan loss provision increased by just 5%.
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SBI chairman Pratip Chaudhuri attributed the rise in NPAs to the bank’s decision against writing off most bad debts like it used to in the past.
“Because write-off means it goes out of the mind, we decided to keep that in our book and continue with our efforts to recover them,” said Chaudhuri. According to him, in the year-ago quarter, the bank had written off around Rs660 crore of bad debts, but in the September quarter, it only wrote off Rs60 crore.
The bank saw about Rs8,000 crore of its assets turn bad this quarter. Net of recovery, the number stood at Rs6,178 crore.
“On the back of continued stress in corporate, SME (small and medium enterprises) and agri sectors, annualized slippage ratio remained elevated at 3.68%,” SBI said in a statement.
The bank saw NPAs rising from largely export-oriented sectors, iron and steel, agro-based business, and government-sponsored schemes. The retail loans did not see much stress in the quarter, the bank’s management said.
“We still see pressure on the asset quality, but we have provided adequately..., but broadly there is stress,” Chaudhuri said.
He also warned that the whole banking industry could see high slippages in the coming quarters.
“In the NPA scene what SBI experiences today, other banks experience tomorrow. It hits them with a lag,” he said.
The bank has a restructured portfolio of Rs35,422 crore out of which 21% has turned NPA. But the bank’s NPA recovery is picking up, said Chaudhuri.
“Slippages (on restructured portfolio) are largely behind us,” he said, adding that fresh accretion of bad debts in the restructured portfolio will be contained going forward.
To mitigate the risks rising from a slowing global economy, SBI has insured its portfolio under various schemes, such as credit guarantee fund trust for micro and small enterprises, and export credit guarantee schemes. This will help the bank save on capital of Rs3,000-4,000 crore and improve its capital adequacy ratio by 30-40 basis points (bps), said Chaudhuri. One basis point is one-hundredth of a percentage point.
The bank’s tier-I capital, or core capital, stood at 7.47% by the end of the second quarter in the overall capital adequacy ratio of 11.4%. The core capital adequacy ratio was eroded by 2% as SBI provided for Rs7,500 crore from its capital towards employee pensions. The bank has been asking the government to recapitalize it to shore up its capital base.
Chaudhuri said the government has committed Rs3,000-4,000 crore as its share of capital and this will shore up the capital base along with the bank’s accrued profit.
Even if the government doesn’t pump in the money, SBI’s tier-I capital will reach 9% by March, he said. The lender will not go slow on disbursing loans as it has enough liquidity, to the tune of some Rs25,000-30,000 crore, available in its books.
SBI’s net interest margin (NIM), or the spread between yields on advances and cost of deposits, touched an all-time high of 3.79% in the quarter against 3.43% a year ago. The domestic NIM stood at a high level of 4.07%. The bank’s 83% of business comes from the domestic market.
The bank expects its margins to improve further as it has seen credit picking up in October and November. The numbers will get reflected in the next quarter, said Chaudhuri.
SBI’s total interest income rose 31.09% as its advances grew 16.93% and its average lending rate rose by 225 bps in the quarter. Deposits grew by 8.31% while the lender aggressively retired its high-cost deposits. High-cost bulk deposits, or deposits from corporate clients, consist of 12% of its total deposit book against 17% earlier.
This improved the profitability of the bank. Net interest income, or the interest earned minus interest expended, increased by 28.43% year-on-year to Rs10,422 crore. However, the non-interest income fell 14.43% to Rs3,427 crore.
According to the SBI management, this is because the bank did not accept interim dividend of more than Rs200 crore from its subsidiaries, while last year’s number was boosted by fee income of about Rs380 crore from an investment banking deal.
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