Mumbai: Even in its darkest times when asset quality woes plagued earnings, State Bank of India ( SBI ) could be relied on to generate decent operating profit growth. In the September quarter, it all went wrong as disappointing operating metrics compounded persisting bad loan problems. Although the bank posted a 30% increase in net profit from a year ago, that has come entirely from tweaks in provisioning and mark-to-market gains in its investment portfolio.
SBI could not grow its loan book since the end of June. Outstanding advances declined by 2% in the three months ended September. While that might not be a bad strategy to avoid bad loans in these troubled times, the bank said it had grown its deposits significantly in hopes of lending more.
As a result, it was left with Rs.70,000 crore of excess liquidity, said chairman Pratip Chaudhuri, which pinched earnings. True, SBI had cut both lending and deposit rates during the quarter, but low-cost current and savings account deposits accounted for a lower portion of deposits at the end of September. The net interest margin shrunk to 3.77%, lower than what it reported in both the June and year-ago quarters. Thus, net interest income grew only by 4.7% from a year ago and other income declined. As a result, operating profit declined by 1.6% from a year ago, the first fall in at least 10 quarters.
So, the heft to net profit came from lower provisioning. The amount the bank set aside as a provision against non-performing assets (NPAs) is 37% lower than a year ago, even though on a year-on-year scale, bad loans are 45% higher. One reason for that could be because the bank had set aside some money against shaky loans such as the Kingfisher Airlines account in the June quarter, the management said.
As noted earlier, this poor operating performance comes against a backdrop of asset quality problems. Overall, SBI added Rs.2,016 crore in gross NPAs. While that looks great considering the Rs.7,480 crore it added in the June quarter, fresh slippages totalled Rs.8,495 crore. So, the addition to gross NPAs was offset by gains from upgrades and cash recoveries. More significantly, the bank wrote off assets worth Rs.1,972 crore compared with an average write-off of Rs.130 crore in the past four quarters. That is certainly not a good sign.
Secondly, the bank is back to restructuring loans with gusto after a brief reprieve in June. It recast loans worth Rs.4,694 crore in the September quarter, much more than the Rs.580 crore it had restructured in June. The bottom line is that total stressed assets (that is, NPAs plus recast loans) account for close to 9.6% of its loans, one of the highest in the industry. The SBI management has guided for Rs.4,000 crore quarterly additions to the restructured loan book for some time to come.
It has also guided for a 16-18% growth in loans for the rest of the year and said that the excess liquidity should help. For now, investors are taking these assurances with spadefuls of salt, as can be seen from the stock’s movement after the earnings announcement.