Here’s the crucial factor in the State Bank of India (SBI) results for the March quarter: operating profit increased by Rs904 crore compared with the corresponding quarter of fiscal 2008, while profit on sale of investments rose by Rs1,212 crore. In other words, the entire growth in operating profit was on account of the gains from treasury operations. While operating profit in the March quarter went up to Rs5,277 crore from Rs4,373 crore in the year-ago period, the bank’s profits on sale of investments went up to Rs1,508 crore from Rs296 crore. Growth in both deposits and advances speeded up during the quarter.
Advances growth was 29.88% year-on-year (y-o-y), a bit higher than the 28.85% y-o-y growth at the end of December. Deposit growth was much higher, at 38.1% y-o-y, compared with 36% y-o-y growth at December-end. The bank says the huge deposit growth dragged down net interest margins, which fell from 3.15% for the nine months ended December to 2.93% for the year ended March 2008. While interest income on advances rose by 25.8% y-o-y, interest expenses on deposits rose 53.47%—hence the margin squeeze.
Despite the strong loan growth, the lower interest margins dragged down the y-o-y growth in net interest income to a mere 0.9%. Staff expenses have risen sharply by 50%, or Rs780 crore, thanks to higher provisions for pensions and wage increases, but the March number is lower than the employee cost during the December quarter. Lower provisions and contingencies (other than for bad loans) also boosted net profits, which rose 45.6% to Rs2,742.31 crore. Did continued lending during the downturn result in more bad loans? The bank management says that most of the rise in domestic non-performing assets (NPA) is on account of the loan to Ratnagiri Gas and Power Pvt. Ltd, and the bad loans taken over from State Bank of Saurashtra. During the March quarter, gross NPAs rose by Rs2,274 crore. But NPAs have been restricted because of the Rs8,310 crore worth of loans restructured. SBI chairman O.P. Bhatt said that possibly Rs2,000 crore of these restructured assets could have become non-performing loans. He admitted that there was significant stress in the small and medium enterprises (SME) sector, and among real estate companies. Looking ahead, Bhatt said that the abnormal increase in deposits is likely to subside and he expects the net interest margin to stabilize. He also said that the Ratnagairi Gas and Power account would become a standard account by June and that the NPA percentage is unlikely to rise.
Bhatt also said that the bank will raise capital because, “in keeping with international expectations and perceptions, it’s better to have higher tier I capital”. The bank has targeted a loan growth of 25% for fiscal 2010, net profit growth of 40% and a net interest margin of 3%. Growth in “other income” for the bank in fiscal 2010 is targeted at 40%.
The bank aims to contain costs and overheads and improve its cost-to-income ratio, thus improving its return on assets, which is targeted at 1.08% in fiscal 2010, as against 1.04% in fiscal 2009. This growth is not supposed to lead to an increase in bad loans; the target is to aim at a reduction of 30 basis points in the bank’s gross NPA ratio.
One basis point is one-hundredth of a percentage point.
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