The country’s largest lender, State Bank of India (SBI), has a basic problem with its core operations. During the June quarter, while the growth in the interest on the loans it has made, compared with the year-ago quarter, was Rs2,343 crore, the increase in the interest paid out on its deposits was Rs3,666 crore.

Putting it another way, the problem is that while deposits increased by Rs2,01,706 crore or 36% y-o-y, the growth in advances has been Rs1,02,046 crore, or 23% y-o-y. The resulting liquidity on the balance sheet hasn’t been good for SBI.

As the bank’s chairman had indicated earlier, its net interest margins were squeezed during the quarter to 2.3 percentage points, one of the lowest in the sector. The effect of SBI’s deposit-raising spree, especially during the last quarter of 2008, continues to take its toll, especially now that lending rates are declining.

Two factors led to the strong 42% rise in the bank’s profit to Rs2,330 crore. One of them was a huge write-back of depreciation of Rs1,200 crore, compared with a depreciation charge of Rs1,657 crore in the year-ago period—that’s a net difference of a massive Rs2,857 crore. Most of the write-back was on mutual funds and equities.

The SBI stock has done worse than the Bankex as analysts have revised their estimates downward on worries over margin pressures. Ahmad Raza Khan / Mint

Asset quality has improved, with gross and net non-performing assets (NPAs) coming down during the quarter, both in absolute terms and as a percentage of advances. For instance, net NPAs were 1.55% of net advances, compared with 1.76% at the end of March.

The bank has taken advantage of the leeway provided by the huge write-back in depreciation provision to increase its loan loss provision substantially. But the lower NPA number also has to be seen in the context of the restructuring of a huge Rs8,118 crore worth of loans during the June quarter.

The SBI stock has done worse than the Bombay Stock Exchange Bankex as analysts have revised their estimates downward on worries over margin pressures. Looking ahead, while the big write-backs and treasury gains will not be repeated, margins are likely to increase as loan growth improves and as the high-cost deposits taken towards the end of 2008 are re-priced. The SBI stock is a play on the economy and should be a big beneficiary of a pick-up in economic growth. Its underperformance with the Bankex should now be corrected.

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