SBI also beefed up the provisioning coverage ratio to 79% in the March quarter from 66% a year ago (Mint)
SBI also beefed up the provisioning coverage ratio to 79% in the March quarter from 66% a year ago (Mint)

SBI takes a final knock on profits to build insurance against loan risks

  • State Bank of India reported a net profit of 838.40 crore for the March quarter, way below the median estimate of 4840.84 crore according to a Bloomberg survey of analysts
  • The bank set aside 24% more provisions against stressed loans than it did in the previous quarter

Mumbai: The country’s largest lender, State Bank of India (SBI), chose to take a huge knock on its profits in exchange for a less turbulent future on asset quality.

The lender reported a net profit of 838.40 crore for the March quarter, way below the median estimate of 4840.84 crore according to a Bloomberg survey of analysts. That is because the bank set aside 24% more provision against stressed loans than it did in the previous quarter.

It beefed up the provisioning coverage ratio to 79% from 66% a year ago. SBI chairman Rajnish Kumar said that accounts such as Essar Steel, Alok Industries and Bhushan Steel have been provided fully and will get the bank decent recoveries. “We have about 16,000 crore recoveries in our pocket," Kumar said, but he preferred not to provide a timeframe. These accounts are at various stages of resolution under insolvency proceedings.

Indeed, the bank has been increasing provisions every quarter and preferred to provide 90% on all accounts that are under insolvency proceedings. In short, the bank has left nothing to chance in the future. The move is understandable given that in the past, SBI had suffered unpleasant surprises on asset quality with chunky additions. The bank’s slippages had surged in every quarter in FY18, pushing it into a loss for the year.

Kumar said by March 2020, all of the past bad loan mess would be cleaned up and provided for. To its credit, slippages have reduced sharply for the March quarter and the pipeline of recoveries look promising. Future risk in terms of special mention accounts (SMA) are low.

Investors seem to have liked Kumar’s optimism and SBI’s stock gained over 3%. That said, the lender still faces uncertainty on recoveries, the key risk to its promise of 1% return on its asset ratio.

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