Despite bad loans piling up at an alarming rate, State Bank of India (SBI) seems to have eased up on increasing provisions, September quarter results show.
As a result, while net profit increased 12.4% from a year ago to Rs 2,810 crore—beating Street estimates and SBI’s own guidance—investors didn’t buy the numbers and knocked 6.7% off the stock’s value on Wednesday.
Gross non-performing assets (NPAs) rose by Rs 6,178 crore in the September quarter. It was much higher than the Rs 2,442 crore accumulation to the gross NPA figure in the June quarter. It also meant that gross NPAs as a portion of total debt rose to 4.19%, possibly the highest among all banks that have declared September quarter earnings, barring Development Credit Bank. This metric was 3.52% at the end of the June quarter for SBI.
However, the bank doesn’t seem to have provided enough for this rise in bad loans. Sure, on a year-on-year basis, total provisions grew 21%, while loan loss provisions grew 35%. However, on a sequential basis—and we are talking about a Rs 6,178 crore increase—total provisions declined 17%, while loan loss provisions rose 5%. Thus, SBI’s provision coverage ratio slipped to 63.5%, well below the 67.25% recorded in the June quarter.
Ultimately, it was the miserliness in provisions that gave heft to the net profit. After all, operating income grew 17.6% in the September quarter over a year ago, the same as that in the June quarter that saw a lot more provisioning. Also, note that non-interest income has been slipping for the bank. In the September quarter, it fell 14.4% from a year ago due to a drop in profit on the sale of investments and dividend income.
One positive for SBI was the rise in net interest margins to 3.79%, a 17 basis points increase from the June quarter. One basis point is one-hundredth of a percentage point.
The bank was able to increase its yield on advances and focus on margins as it had indicated at the beginning of this fiscal year. But that also meant loan growth came in at a somewhat sedate 17% from a year ago.
Perhaps that is okay as well because the bank needs capital fast. Remember, in its downgrade note last month, Moody’s Investors Service had indicated that “capital deployed for loans growth, assuming 15% per annum for the next three fiscal years, will cause the tier-I ratio to fall below 8%”.
SBI’s tier-I capital adequacy ratio has slipped further to 7.47% from 7.6% at the end of June. While there have been reports of the government agreeing to capitalize the bank, no action has been forthcoming. In its downgrade note on the Indian banking sector, Moody’s said the challenging macro environment will affect asset quality, capitalization and profitability.
On the other hand, SBI chairman Pratip Chaudhuri, in an interview to CNBC-TV18 news channel, talked about a “reversal of the (rise in NPA) trend because some of the accounts that went into the NPA category pretty late in the quarter are likely to come back”.
Investors will hope he’s right, to justify the huge premium enjoyed by SBI over most of its public sector peers.
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