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Home / Industry / Banking /  SBI hopes for an encore as FY21 ends on a high note

India’s largest lender by assets ended a year marked by a deep recession by reporting a record quarterly net profit and an improvement in most of its asset quality metrics.

What’s more, State Bank of India (SBI) chief Dinesh Khara believes the bank may replicate the performance this fiscal, too, despite the threat from the second covid wave. “We do not see any concern over asset quality this year," he said in an interaction with the media last week while announcing the quarterly earnings.

SBI reported a 15% fall in its gross bad loan stockpile to 1.26 trillion for FY21. In percentage terms, bad assets formed just 4.98% of its loan book, far lower than the 6.15% for FY20. In almost every asset quality metric, the pandemic year FY21 was better than the previous year for SBI. Fresh slippages were 48% lower than FY20. A lot of this is because of forbearance. Indeed, SBI has had help from regulatory forbearance and fiscal measures that offset some of the unsavoury impact of the pandemic on its balance sheet.

Pitch imperfect
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Pitch imperfect

The six-month moratorium, the option of restructuring loans without treating them as bad, and the credit guarantee scheme from the government all worked out well for SBI. Also, the full-year performance shows a steady improvement every quarter, mirroring the recovery of the economy. The bank’s balance sheet is considered a good gauge of the economy’s performance. Investors cheered this outcome, driving the bank’s shares up more than 4% on Friday.

But they should not be lulled by this improvement. Another fact that investors should remember is that past performance does not guarantee the same in the future. There are three details that threaten this robust performance.

First, SBI’s written-off accounts continued to be roughly three times of its upgrade and recoveries. What this means is that a high number of stressed loans are turning for the worse and had to be removed from the balance sheet.

Second, potential stress has increased sharply. Loans where repayment was overdue for more than a month rose by a whopping 58% in FY21. The weakest point in defaults was small business loans. Fresh slippages may have fallen across the portfolio, but loans to small and medium enterprises (SMEs) slipped almost at the same rate as in FY20. MSMEs have borne the biggest brunt of the pandemic.

Third, the management lacked the conviction on achieving the guidance on slippages and appeared more guarded this time, unlike last year.

Khara’s comment didn’t ring with the same confidence as it did in his interaction a year ago. The management was guarded, and Khara peppered his statements with a caveat that “these are very early days". Analysts, although impressed with the performance, believe that there are enough challenges ahead for SBI.

“SBI’s numbers are overall very good, but we have to see how the second wave pans out," said an analyst, requesting anonymity. Indeed, SBI’s efforts to maintain asset quality would be tested in the coming quarters. High-frequency data in the first two months of FY22 have not been favourable.

Lockdowns, though not as strict as last year, are in force across most states, restricting mobility. The unemployment rate has climbed back up, and small businesses have begun to get hit on revenues again.

Analysts at HSBC pointed out that bad loans turn up only after a lag of a few quarters. This means that the pandemic’s true impact would be known only a handful of quarters later. There is a fair chance that SBI may see its numbers worsen.

While it battles stress, a clear impact of the pandemic was visible on loan growth. SBI had guided for a 7% loan growth, but the book grew by a modest 5% for FY21.

But Khara is hopeful that the bank may expand its advances by at least 10% this fiscal. His hopes hinge on the speed of the vaccination drive, which is currently rather slow. Faster inoculation would mean a faster economic recovery. Ergo, SBI’s fortunes, too, are linked closely to how fast India inoculates its citizens.

Meanwhile, the bank has its own vaccine in the form of provisions. Its provision coverage ratio is an admirable 71%, excluding write-offs. But just like vaccines, provisions act only as insurance and are not a cure.

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