The September quarter earnings of the country’s largest lender, State Bank of India, brought much-needed cheer to an otherwise gloomy banking sector. Net profit at 3,012 crore was up by nearly three times from the year-ago period. The 7.3% gain in the stock on Thursday was justified with profit comfortably beating estimates.

When the bank’s chairman Rajnish Kumar sought divine intervention in the June quarter—“every morning I am looking at the sky and praying to God" is how he put it—SBI’s balance sheet had been hit by a surge in fresh slippages. Three months later, these slippages have halved and the pile of dud loans is down to 7.19% of its loan book.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

Clearly, this sharp reduction in stressed loans has given confidence to Kumar to commit to the worst-case scenario of a 2% slippage ratio for FY20. Kumar was hopeful that the ratio will be lower.

“We expect gross slippages in a not-so- good scenario to not exceed 2%. We believe that the current run rate of 8,000 crore slippages per quarter in a 23 lakh crore loan book is normal," said Kumar.

The other boost was an over-17% growth in core income, propelled by an 18% growth in retail loans.

Even if Indian companies are not borrowing, consumers, it seems, are still willing to fund their purchases through loans.

Indeed, SBI’s strong retail loan growth belies the broad narrative of a consumption demand slowdown in the economy.

But no banker leaves everything to God and, as they say, the devil is in the details. Here are three:

First, SBI is yet to move to a lower tax regime after the corporate tax cut. What this means is that the bank is yet to account for deferred tax assets which will weigh on profits of the future quarters. Further, the lender had to use all the gains it got from the stake sale of SBI life Insurance towards provisions.

Part of it went towards the beleaguered Dewan Housing Finance Corp. Ltd, to which the bank has an exposure of 7,000 crore. More than 60% went toward a power borrower due to a failed resolution.

Second, SBI’s loan write-offs are still high. For the September quarter, the bank wrote off 12,053 crore worth of bad loans, a bit lower than 16,000 in the previous quarter. Write-offs helped SBI to reach a provision coverage ratio of 81%. Had it not written off loans, its provision coverage ratio would be an unimpressive 62%. Write-offs still drive the reduction in SBI’s bad loan pile.

Third, SBI still has to face a large line of insolvency cases in courts. The high level of provisioning done by the lender should give some comfort to investors. The lender said three accounts were in the final stages of resolution, with an expected recovery of 62%. The impending stress from the telecom sector, after the Supreme Court ordered telcos to pay up licence fees will also have an impact on SBI’s asset quality. Kumar’s comment on the likely impact was non-committal.

In short, SBI’s September performance brings cheer to investors, but is not enough to dispel the gloom on the economy.

With some prayers answered, Kumar has to get down to the business of getting the cheques overdue from troubled marquee borrowers. Most of all, SBI will have to find a resolution for DHFL to save its 7,000 crore.