The March quarter results of State Bank of India (SBI) came as a negative surprise, with net profit falling 32% to Rs1,867 crore from a year ago. While some analysts were expecting profit to decline, the actual drop was sharper than estimates, prompting a 4% drop in the bank’s share price on Friday.

SBI’s operating profit declined by 1.6% during the quarter from a year ago. The bank estimates its profit took a hit of Rs3,500 crore due to a combination of factors.

Graphic: Naveen Kumar Saini / Mint

Excess liquidity, due to low credit demand, caused a hit of Rs273 crore. Staff hiring and new branch openings saw operating costs rise by Rs923 crore.

Investment income was 72% lower in the March quarter due to weak market conditions and a relatively high base with Rs1,400 crore in profit on government securities in the year-ago quarter.

Provisioning for non-performing assets (NPAs) was Rs674 crore, though this figure has been steadily declining since September.

The bank’s core metrics did show an improvement, however. Its net interest income was up by 39% year-on-year, and its net interest margin, though lower compared with a year ago, improved sequentially.

The bank has lowered interest rates and is getting rid of high-cost bulk deposits and increasing the proportion of lower cost current account deposits, savings account deposits and term deposits. Total advances as of March were 17% higher while deposits grew by 6.2%, and its credit-deposit ratio went up to 73.56% compared with 71.48% as of December.

The news on the NPA front was mixed. Fresh NPAs at Rs2,500 crore were lower than the December quarter figure. Of the Rs1,000 crore of corporate loans that turned bad, nearly half will be restructured or will turn standard by September. Despite lower NPAs, higher provisions led to its provision cover ratio rising to 59.2% from 56.2% in the December quarter.

Going forward, the bank expects the current fiscal year to be a year of consolidation. The focus will be on cost control. Credit growth is expected to improve from the second quarter and the liquidity overhang will be less of a problem. Recruitments will continue but at around half of earlier levels.

SBI’s yield on advances has been falling because a higher proportion of loans are being given at below its prime lending rate, especially for home loans. But its cost of deposits has been falling, too, due to lower interest rates and a higher proportion of low-cost deposits. Its incremental branch and employee strength will take some time to reflect in growth in business. Till then, a higher cost-to-income ratio (at 53.75% versus 44.8% a year ago) could affect its performance.

If credit growth recovers as expected, the incremental addition to its profits will be significant because of better net interest margins.

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