State Bank of India (SBI) seems to have done a lot of cleaning up recently. Thus, in the three months ended March, it actually saw a fall of Rs 421 crore in its gross non-performing assets (NPAs), compared with the Rs 6,000-odd crore additions in the previous two quarters. At the end of March, gross NPAs were 4.44% of SBI’s loan book, compared with 4.61% three months ago.
This is something of a surprise, considering that companies’ profits are falling and their ability to service loans is declining, while interest rates continue to remain high.
One reason for the fall in NPAs is because SBI upgraded Rs 3,118 crore of assets in the March quarter, almost equivalent to what it did over the first nine months of the last fiscal year. It also made cash recoveries of Rs 1,603 crore in the fourth quarter, compared with Rs 942 crore in the December quarter.
Even the rate of fresh slippages declined. New additions to bad loans totalled Rs 4,383 crore in the three months ended March, compared with Rs 8,000-odd crore in the December and September quarters.
The only glitch in this happy scenario was that restructured assets rose sharply in the March quarter. But then, that was similar to what was observed for the entire banking industry last quarter. SBI recast loans worth Rs 5,300 crore in the latest quarter, compared with Rs 2,188 crore in the December quarter.
At the end of March, SBI had some Rs 37,168 crore of restructured assets, almost equivalent to gross NPAs. Therefore, total impaired assets (gross NPAs plus restructured loans) are nearly 8% of its loan book, which is still a high number.
However, in a post-earnings conference, chairman Pratip Chaudhuri said that only “4-5% (of these assets, or about Rs 1,850 crore) will become an eventual loss”.
The markets seemed to be relieved by these numbers and reassurances. SBI’s stock gained 5.08% on Friday when the broader markets remained relatively unchanged. It was also a salute to the expectations-beating net profit of Rs 4,050 crore in the March quarter. While the number isn’t comparable with that a year ago because of one-time charges in March 2011, it must be noted that the 8.5% decrease in provisions gave it a boost.
The stock price movement, however, should be cautiously interpreted. Remember, banking stocks and SBI itself have been pretty depressed for some time and this could be some sort of a relief rally.
Another point to note is that SBI’s loan book increased by 15.8% from a year ago, at a rate slower than industry growth. While the bank says it will target a 16-18% increase in assets this fiscal year, Chaudhuri admits he isn’t sure whether this is achievable.
Secondly, is the run of good asset quality numbers sustainable? Corporate indicators such as a 14% decline in profits for 246 BSE-500 companies (excluding banks) and economic data such as the recent industrial production numbers, besides high interest rates, indicate pressure on companies.
Simply put, SBI is a play on the economy and the economy isn’t all that hot at the moment.