The State Bank of India stock has fallen by 25% from its peak in early November, mainly on concerns about margin compression.
But the bank’s net interest margin rose in the December quarter to 3.61% from 3.43% in the September quarter.
Not only did yield on advances improve, the cost of deposits also went down in spite of higher deposit rates. The secret: a rise in low-cost Casa (current and savings accounts) to 48.17% of deposits from 47.79% in the previous quarter.
While margins improved, loan growth accelerated to a y-o-y (year-on-year) rate of 21.88%, thus increasing net interest income by an excellent 43.28%.
Although non-interest income was lower than in the year-ago period because of lower trading profits, overhead expenses were contained and operating profits were up 46.48% y-o-y.
And, although provisions were much higher as the bank has to reach the Reserve Bank of India’s stipulated cover of 70%, net profit growth at 14.08% was above Street estimates.
Growth of non-performing assets during the quarter was below that in preceding quarters, and the net NPA ratio improved from 1.7% at end-September 2010 to 1.61% at the end of December.
Restructured assets rose sharply, but a large chunk of that was due to restructuring of loans to Kingfisher Airlines Ltd, as revealed at the bank’s conference call.
In short, loans are picking up, asset quality is improving and the pressure on margins is still some distance away. The clouds on the horizon are the additional provision that will have to be made for pension liabilities and if provisions on teaser housing loans are required by RBI although SBI says their loans aren’t teaser loans.
But the bank will get a cushion from its planned rights issue and another retail bond issue in February. After the bank’s results, the sell-off in the stock looks overdone.
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