The fact that State Bank of India (SBI) would have a tough June quarter was anticipated; but the earnings show the pain was more than expected.

Net profit slipped 45.7%, well below Street expectations, as the bank had to play catch-up with provisioning requirements. The bank’s provisions (including tax) increased 75% from a year ago as non-performing assets increased by a net Rs2,442 crore during the quarter. This includes loan-loss provisions, which rose 60%, and Rs1,048 crore of investment depreciation, compared with a Rs298 crore surplus a year ago.

Also See | Slipping And Sliding (PDF)

The bank’s provision coverage ratio improved to 67.25%, an improvement over the March quarter, but still short of the Reserve Bank of India’s target of 70%. What it means is that despite a slight drop in net non-performing assets as a portion of advances to 1.61% for the June quarter—down 2 basis points (bps) from March—the bank will have to continue to make provisions. One basis point is 0.01%. SBI had set aside Rs550 crore in the June quarter as a counter-cyclical provisioning buffer. It has to provide for an equivalent amount by the end of the current quarter to meet the central bank’s requirement of Rs3,430 crore. This means the clean-up is not over yet, and there is more pain to come.

Gross advances increased 18.7% over a year ago, less than the system’s growth. But, then, SBI’s strategy seems to centre around protecting margins. Net interest margin (NIM) rose to 3.62% at the end of June, up 55 bps from the March quarter. However, note that current and savings accounts (Casa) deposits—the cheapest source of funds—are not growing fast. Casa funds as a portion of overall deposits have slipped to 47.9% at the end of June quarter, from 48.7% three months ago.

SBI’s management indicated that the bank was targeting a 3.5% NIM for the fiscal year. The recent base rate hike of 50 bps should help.

Operating profit grew only 18% from a year ago. Chairman Pratip Chaudhuri indicated in a post-results conference that a portion of the term deposits, which had come in during the Lehman crisis and were earning 10-11%, are due for renewal at current rates which are much lower. That is another factor which could help the bank meet its NIM target.

However, the bank is in need of capital and fast, as indicated by its deteriorating capital adequacy ratios. SBI’s tier I capital adequacy ratio has declined to 7.6% at the end of June, compared with 7.77% three months ago. The bank’s management indicated the government will pump in Rs5,000-9,000 crore through a rights issue.

The outlook is still bleak for at least another quarter. Apart from the provisioning requirements, it will have to keep bad loans in check. Economic growth is moderating as the Reserve Bank keeps on increasing rates, and there is a fear that bad loans may mount. Fresh slippages continued to grow at an alarming rate and touched Rs6,180 crore in the June quarter. The accompanying chart says it all. The bank, itself, seems to be acknowledging that as it forecast a net profit of Rs2,500 crore for the quarter ending 30 September, the same figure as a year ago.

Graphic by Ahmed Raza Khan/Mint

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