State Bank of India Chairman, Rajnish Kumar.  (PTI )
State Bank of India Chairman, Rajnish Kumar. (PTI )

Economy is hurting, but hope springs eternal for SBI chief

  • The performance of the country’s largest lender shows key signals of how sustainable the economy’s recovery is
  • If investors need more reason to be sceptical about SBI’s recoveries, they don’t need to look beyond past performance

MUMBAI: For the chief of the country’s largest lender, hope is a potent motivation to offer optimistic forecasts.

Rajnish Kumar, chairman of the State Bank of India (SBI), is hopeful of better days and his confidence stems from a remarkable improvement in the bank’s asset quality metrics. SBI’s bad loan ratios fell sharply during the March quarter not simply due to higher loan growth, but through actual reductions in the stock of toxic loans. Even fresh slippages reduced by 75% from a year ago, and loans showing incipient signs of stress also declined.

A grounded airline is unlikely to affect bad loan metrics in a big way, although the bank had to set aside a chunk of money as provisioning during the March quarter.

So, when Kumar said the world lives on hope, investors played along and forgave the bank for a woefully small quarterly net profit. SBI’s stock gained nearly 3% on Friday after the quarterly results.

To be fair, the lender gave enough reasons to cheer. Kumar indicated that the bank would be able to recover 16,000 crore from errant borrowers that are undergoing insolvency proceedings. He also said the lender would bring down bad loan ratios further and that the goal of a return-on-assets ratio of 1% could be achieved a year earlier than anticipated.

This optimism stems from the sharp fall in special mention accounts (SMA), which show incipient signs of stress. SBI’s SMA stock has dropped by almost 10,000 crore.

The performance of the country’s largest lender shows key signals of how sustainable the economy’s recovery is. To that extent, SBI’s metrics should mean the economy is turning around.

But here is the catch. A troubling fact is the extent of insurance SBI was raking up through provisioning, the very reason for the low profit. It seems that the lender was not sure of future recoveries. It provided 17,336 crore towards bad loans even though the toxic pile of assets declined 23%. Provisions are lower than those of last year, reflecting the fall in bad loans. Even so, SBI has chosen to forgo profits to buy some peace on asset quality in the future.

In all, its provision coverage ratio went up to 78%. The act of beefing up insurance typically springs from a pessimistic view. It shows that SBI is not sure that errant borrowers would pay up, resulting in high recoveries.

If investors need more reason to be sceptical about SBI’s recoveries, they don’t need to look beyond past performance.

SBI wrote off loans worth over 17,000 crore in the March quarter, taking the full-year write-off to 58,905 crore. That contributes 65% to the reduction of bad loans. This means SBI has not been able to recover money from errant borrowers and has had to just remove troubled loans from its balance sheet.

Further, the fact that the lender doesn’t expect loan growth to rise from 12% is an indication that the recovery will be long-drawn.

Add the latest government data release that shows industrial output shrank 0.1% in March and things don’t look sanguine.

SBI has mended its balance sheet, but it would be better for investors to hold off a while on optimism until clear signs of growth emerge.

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