The success of State Bank of India (SBI) in reducing its high-cost deposits is evident in its results for the September quarter. The proportion of high-cost bulk deposits has diminished from 16.8% a year ago to 3.6%. The result has been a rise in its net interest margin (NIM), with the average cost of deposits coming down by 10 basis points to 6.06%, compared with the June level. One basis point is one-hundredth of a percentage point.
Speaking to analysts, SBI chairman O.P. Bhatt said that he expects the cost of deposits to continue decreasing for the next three-four quarters. He expects improvement in NIM will also continue quarter after quarter—albeit at a more modest pace of 10-12 basis points per quarter, lower than the 25 basis points rise in the second quarter compared with the first. An increasing credit-deposit ratio and what he termed “appropriate pricing of credit” will also help increase NIM. Significantly, while the bank’s prime lending rate (PLR) has come down by 200 basis points from a year ago, the yield on advances has fallen by only 29 basis points, implying less sub-PLR lending. The continuation of these trends, taken together with the management’s forecast of 22-25% loan growth this fiscal (year-on-year, or y-o-y, growth was 16.39% at end-September), will buoy SBI’s earnings in the future.
Growth in core fee income has been a very high 58% y-o-y. The management puts it down to the upsurge in project lending syndication arranged by the bank. Increased profits on sale of investments also boosted profit. Comparing the second quarter with the first, half of the sequential rise in operating profit from Rs3,674 crore in April-June to Rs4,835 crore in the September quarter has been due to lower operating expenses, while the other half is on account of an increase in net interest income.
Graphics: Paras Jain / Mint
Provisions, however, were much higher in the second quarter, which is why net profit at Rs2,490 crore is only slightly above the first quarter’s net profit of Rs2,330 crore. That brings us to asset quality, which, as widely expected, has deteriorated. The gross non-performing asset (NPA) ratio has gone up from 2.79% at the end of June to 2.99%. The net NPA ratio has similarly risen from 1.55% to 1.73%. Nevertheless, the slippages in asset quality are already factored into analyst estimates, given SBI’s high growth in loans. Kotak Institutional Equities research, for example, has projected SBI’s gross NPA ratio to rise to 5% by March 2011.
Of more immediate concern is SBI’s low provision cover of 42.87%. The Reserve Bank of India (RBI) has said that banks will be required to raise provision cover to 70% within a year, which will mean huge provisioning requirements for banks such as SBI and a consequent decline in profits. The SBI chairman told analysts that the bank had taken up the matter with RBI, and the central bank had assured him it would take a re-look at it.
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