Kolkata: State Bank of India (SBI) posted a 31.9% drop in net profit to Rs1,867 crore for the March quarter and missed analysts’ estimates by a wide margin as the country’s largest lender set aside more funds for bad loans and operating expenses rose.
This is SBI’s first drop in net profit in 13 quarters. A Reuters poll of analysts had forecast a 3% rise in net profit to Rs2,822 crore. Net profit for the March quarter at ICICI Bank Ltd and HDFC Bank Ltd, India’s top two private sector lenders, and Punjab National Bank, the biggest state-run bank after SBI, grew by about one-third.
Higher provision: SBI chairman O.P. Bhatt. Hemant Mishra/Mint
SBI had to set aside Rs2,187 crore as provisions for bad loans, 68.7% higher than what it had provided for in the corresponding period of the previous year, as quality of assets deteriorated. Operating expenses, on the other hand, rose 40.9% to Rs6,036 crore, as the bank hired 27,000 people and expanded its network of branches and automated teller machines to seize growing business opportunities in the world’s second fastest growing major economy.
SBI’s shares fell 4% to close at Rs2,222.65 apiece on the Bombay Stock Exchange on Friday while the bourse’s benchmark Sensex index lost 1.57% to close at 16,994.60 points. For the entire year, the bank’s net profit rose marginally to Rs9,166 crore.
Increase in interest income during the quarter was also marginal: it grew 3.6% to Rs17,966 crore. For the year, SBI’s interest income grew 11.3% over fiscal 2009 to Rs70,994 crore.
SBI chairman O.P. Bhatt said the increase in provisions for bad loans was because of “ageing” stressed assets for which the bank had to provide more in keeping with banking regulations. Its non-performing assets (NPA) rose during the quarter by Rs674 crore net of recoveries. Some 20-odd large and mid-size firms accounted for Rs1,000 crore of new NPAs, Bhatt said. “We should be able to turn at least half of these into standard assets through restructuring within a few months,” he added.
SBI saw significant pressures on asset quality in this quarter and that’s a negative compared with the private sector banks, said Vaibhav Agrawal, vice-president of research at Mumbai-based Angel Broking Ltd.
India’s banking regulator has mandated that all banks should provide at least 70% of the value of their NPAs. SBI has till 31 March provided 59.2%, and would have to provide at least Rs3,500-4,000 crore more if it was to comply with the norm by 30 September. It has approached the regulator seeking more time. “If we were to provide that amount of money (over the next two?quarters),?there would be no profit at all,” Bhatt said.
A report released by Ambit Capital Pvt. Ltd immediately after the bank announced its earnings said the provision coverage ratio “is a cause for concern”. Another key reason for the decline in SBI’s profit was the “liquidity overhang”.
The bank had Rs40,000 crore of deposits at the end of March that it could not deploy. “There is a negative carry of Rs273 crore on this amount,” Bhatt said, adding that SBI was looking to pare deposits over the next few months.
Despite this, net interest margin—a critical parameter of a bank’s operational efficiency—during the quarter at 2.66% was 27 basis points higher than the corresponding quarter last year. One basis point is one-hundredth of a percentage point.
The bank said its net interest income, or the spread between interest earned and spent, during the quarter at Rs6,721 crore was the highest in the last eight quarters. This was on account of a 10% reduction in interest expenses during the quarter.
SBI expects credit growth in the current fiscal to remain flat at least till June, but its loan book to expand by 21-22% during the current year.
To keep pace with credit growth, SBI needs to shore up capital and wants to raise Rs15,000-20,000 crore through a rights issue this fiscal and is persuading the government to subscribe to it.
Reuters and Bloomberg contributed to this story.