Markets
Why SBI is comfortably placed despite slow growth in deposits
Summary
- Some of the large peers of SBI, like ICICI Bank, Axis Bank and Kotak Mahindra Bank managed to achieve deposit growth in the range of 13-21%. But the state-run lender decided not to chase deposits aggressively for a couple of reasons
It is easy to find fault with the State Bank of India’s slow growth in deposits, which was 8% year-on-year compared to advances that grew twice the rate during the June quarter (Q1FY25).
This is because some of its large peers like ICICI Bank, Axis Bank and Kotak Mahindra Bank have managed to achieve deposit growth in the range of 13-21%. However, it was a conscious decision by the bank not to chase deposits aggressively by outpricing competitors. There are a couple of reasons for doing so.
One, the net loan-deposit ratio (LDR) of the bank is lower at 76% as against large peers that appear to have stretched themselves with the ratio in the range of 87-92%, the highest being HDFC Bank at 104%. A high LDR indicates a more aggressive lending strategy, as large portion of the bank’s deposits are given out in loans. It poses dual risk of liquidity and bad loans.
Two, the bank already has an excess statutory liquidity ratio (SLR). It is the minimum percentage of deposits, currently at 18%, that the commercial bank maintains through gold, cash and other securities. The bank has an extra holding of SLR mainly in government securities of about ₹3.7 trillion with an available for sale (AFS) portfolio of ₹2.8 trillion, which can be sold to fund the growth in advances if needed. Therefore, the bank does not feel the need to raise deposits through aggressive pricing.
Even though the net interest margin (NIM) in percentage terms came down by 12 basis points year-on-year to 3.35%, the lower growth in deposits vis-a-vis advances meant that absolute net interest income rose by 5.7% to ₹41,135 crore. Even though other income fell by 7.5%, the quality of other income improved as fees increased by 4.5% and the share of volatile treasury income fell. As operating expenses remained flat, core (excluding treasury gains) pre-provisioning operating profit (PPOP) showed a strong growth of 11.8%. A 70% jump in NPA provisions moderated the core PBT growth to 8.1% to ₹18,758 crore.
The credit cost for the quarter stood at 0.48%, much higher than 0.32% year-on-year and 0.29% sequentially. However, this is still not alarming and in line with the trend seen so far in the banking sector. In addition, the bank carries additional non-NPA provisions of ₹31,000 crore. This extra provision, considering its loan book of ₹37 trillion, should help in absorbing any future shocks in NPAs. For FY25, the credit cost guidance remains at almost Q1 level.
More importantly, there is a hanging sword of expected credit loss (ECL) based provisioning norm coming into force with high probability in FY26. But the bank’s management is confident of smooth transition to the new norm.
The bank aims to maintain NIM in the range of 3.2-3.4% going forward with advance growth target of 15%. Even though deposit rates have increased year-on-year, the bank is hopeful of mitigating the adverse impact through two consecutive hikes in marginal cost of funds-based lending rate (MCLR) by a total of 15-20 bps. Note that MCLR-based loans account for 36% of SBI’s total loans.
Considering the guidance about credit cost, NIM and advance growth, it is likely that Q1FY25 results are a fair reflection of FY25. Brokerages like Kotak, IIFL, Antique, Ambit are forecasting a drop in RoE in FY25 over FY24. In view of the same, the scope for further rerating looks difficult even though the bank trades at a lower price to adjusted book value (P/ABV) compared to most of its private sector peers.
