State Bank of India’s (SBI) previous chairman O.P. Bhattis credited with policies that have increased the bank’s market share and boosted its stock price. But what kind of a strategy is it that ensures you don’t grow your net profit for three years? In fiscal 2008-09 (FY09), SBI’s net profit was Rs9,121 crore; in FY10, it was Rs9,166 crore and in FY11, it was Rs8,265 crore. Did SBI’s quest for market share lead it into the same trap in which ICICI Bank Ltd had fallen earlier?

The fourth quarter results have been a shocker and not only because of higher provisions. The bank’s all-round performance has shown a sharp deterioration. The provisions merely delivered the final punch that knocked out the stock on Tuesday. The question is: how was it that the bank’s net profit grew 12.94% during the first nine months of FY11, but fell 9.84% for the entire fiscal?

Also see | Knocked Off (PDF)

Consider, for example, the bank’s operating profit, before provisions, for the March quarter. It increased by a comparatively tepid 17% year-on-year (y-o-y). Compare that with the December quarter’s increase of 46.5% y-o-y.

What went wrong during the March quarter? Growth in net interest income (NII), compared with the same period of the previous year, was 19.9%. This was appreciably lower than the 43% growth in NII for the December quarter. Indeed, NII in the March quarter was well below that during the December quarter.

Why was NII lower? Not because of interest on advances or on investments—these were higher in the March quarter than in the December quarter. The key factor was the rise in interest expenses. During the December quarter, interest expenses amounted to Rs12,363 crore, while they increased to Rs13,663 crore in the March quarter.

The higher rates paid on term deposits have taken their toll, while tighter liquidity led to more reliance on bulk deposits. Note that the term deposits growth during the March quarter on a y-o-y basis was much higher than that during the December quarter. On the other hand, growth in advances, again on a y-o-y basis, slowed a bit. The net interest margin also declined compared with the December quarter. All these factors together led to the much lower growth in NII. Also, fee income growth during the March quarter was a low 7% y-o-y.

Staff expenses, too, did their bit to drag down profit, increasing 17.5% y-o-y, much higher than the y-o-y increase during the December quarter. The bulk of the pension liability relating to earlier years was, however, routed through the balance sheets, lowering reserves rather than net profit. The bank management says all of FY11’s profit went towards offsetting the pension liabilities. They also said pension costs this fiscal are likely to be lower than FY11’s pension costs of Rs2,473 crore, routed through the profit and loss account.

What about bad loans? Well, the bank has taken a huge loan loss provision of Rs3,264 crore in the March quarter, compared with Rs2,187 crore in the same period of the previous year and Rs1,632 crore in the December quarter. That’s apart from the one-off provision for teaser loans. At the end of March, the provision coverage ratio for SBI was 64.95%, up from 64.07% at the end of December. That means the bank will have to continue to make further provisions to take the coverage ratio to 70% of bad loans outstanding as stipulated by the Reserve Bank of India (RBI).

The notes to SBI’s March quarter results point out that the counter-cyclical provisioning buffer created so far is Rs2,330 crore of the Rs3,430 crore needed to be created and the balance provisioning will have to be done by 30 September. It’s an indicator of more pain to come.

Moreover, in spite of the increased provisions, net non-performing assets (NPAs) were 1.63% of advances, compared with 1.61% at the end of December. Fresh slippages into NPAs increased to Rs5,645 crore in the March quarter, compared with Rs2,504 crore in the year-ago period. Why did slippages increase so much during a year when the economy grew so strongly?

And that’s not all—the slippage from the bank’s restructured assets portfolio of Rs18,395 crore has increased to 17.04%, from 15.68% at the end of December. The upshot of all this was that profit before tax was lower by 32% compared with the year-ago period. To make matters worse, tax provisions, too, rose sharply, as many of the provisions made were not tax-deductible, thus crushing net profit to a miniscule Rs21 crore for the March quarter.

What ties all these factors together is SBI’s rush for growth, which has led to high NPAs and lower margins. “They wanted to teach the elephant to dance," said Hemindra Hazari, head of research at Nirmal Bang Institutional Equities, “and that has consequences."

He said the March quarter results need to be seen in the context of the recent sharp rise in the bank’s base rate. “The bank clearly recognized that margins were being affected and the rush to gain market share was having undesirable side effects," said Hazari.

What of the future? SBI chairman Pratip Chaudhuri said, “Going forward, we do not expect any surprises." He said net interest margins will improve this fiscal because housing loan rates have increased and base rates have gone up, in spite of the increase in the rate on savings bank deposits. Chaudhuri expects loan growth of 17-18% in FY12. More importantly, he stressed that he has cleaned up the balance sheet.

The fact remains, however, that the bank will have to make substantial provisions in the June quarter on account of the new norms for sub-standard assets and for restructured standard assets. Also, if slippages into bad loans are so high during times when the economy is doing fine, won’t they get worse when the economy slows, as RBI is so keen to ensure?

The SBI stock plummeted on Tuesday on these fears. That is entirely understandable, considering the fact that the bank’s book value per share stood at Rs1,014 as on 31 March, lower than Rs1,029 as on 31 March 2010.

Graphic by Yogesh Kumar/Mint

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