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Business News/ Market / Mark-to-market/  SBI results: Restructured loans spook investors
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SBI results: Restructured loans spook investors

SBI investors realized that the headline improvement in bad loan numbers hid other, less pleasant details

SBI’s gross non-performing asset (NPA) ratio fell to 4.25% at the end of March compared with 4.9% three months earlier. Photo: Pradeep Gaur/MintPremium
SBI’s gross non-performing asset (NPA) ratio fell to 4.25% at the end of March compared with 4.9% three months earlier. Photo: Pradeep Gaur/Mint

Mumbai: State Bank of India’s (SBI’s) share price had a roller-coaster ride on Friday as investors realized that the headline improvement in bad loan numbers hid other, less pleasant details. The shares closed 2.4% down after having climbed as high as 5.4% earlier in the day.

SBI’s gross non-performing asset (NPA) ratio fell to 4.25% at the end of March compared with 4.9% three months earlier. Even in absolute terms, it represented a reduction of 5,266 crore. Slippages showed an improving trend as well—falling to 4,769 crore in the March quarter compared with 7,043 crore in the three months ended December. Recoveries, too, were strong at 4,485 crore.

More importantly, the bank restructured 11,800 crore of loans in the fourth quarter, double the 5,500 crore it had guided for in February. To be sure, restructurings were anyhow supposed to increase since fresh recasts from this financial year will attract a higher rate of provisioning. A good part of this restructuring was pre-emptive since “no one wants the NPA tag", said Arundhati Bhattacharya, SBI’s chairperson, at a press conference. There’s another 2,625 crore of assets waiting to be recast in the current quarter under the Reserve Bank’s new window.

Leaving aside restructurings, the main question for investors is whether this trend of falling slippages is sustainable in an environment where corporate earnings show no sign of a pickup and both consumer and investment demand remain sluggish. Even in the case of recast loans, about one-fifth slip into the NPA category, as SBI’s own numbers show.

Industries such as construction, iron and steel, cement and power are plagued with overcapacity and lack of buyers, leading to stressed cash flows. Most of these companies lack liquidity and are sitting on a pile-up of receivables with stretched working capital cycles. Only a bounce-back in demand can relieve the pressure on these firms.

The market buzz is that loan sales to asset reconstruction firms are happening at 40% haircut rates. In that scenario, it is difficult to be confident that the bad loan problem is largely behind the banks and bank balance sheets are clean. Overall impaired assets for SBI (bad loans plus recast) are still a high 8.43% of its loan book.

At the same time, loan growth has been a tepid 7.25%, though the bank says it expects a pace of 13-14% in the current financial year. That can only happen if an economic recovery takes root over the next couple of quarters.

The writer does not have positions in the company discussed here.

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Published: 22 May 2015, 09:24 PM IST
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