Home / Markets / Mark To Market /  SBI has done well on asset quality; it's time to focus on growth

Past and present, chairmen of India’s largest lender State Bank of India (SBI) are notorious for being optimistic and even exuberant. ‘Worst is behind us’ has been a statement given by most of the past chiefs, including the present one, after the passing of every bad episode. The performance, however, hasn’t matched this optimism many times.

Would it be different this time?

SBI’s stellar performance for the September quarter, though, gives enough reason to current chief Dinesh Khara to exude optimism yet again. The lender reported a 67% jump in its profit to 7,627 crore for the September quarter, beating street estimates comfortably. The fact that this is backed by a healthy 9.8% growth in operating profit and a 10% growth in core interest income is reason enough for investors to cheer. The nearly 2% gain in the bank’s share price on Wednesday post the results shows that investors have noted this.

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Half full of empty?

Khara believes that the bank’s sustained efforts would keep its asset quality from getting into trouble again. “We will continue to repeat our efforts on the ground to ensure asset quality stays the best," he said in a call with reporters after the results.

The gross bad loan ratio is now down to 4.9% from close to 6% a year ago. In fact, it can be said that the pandemic has been good to SBI, unlike the episode of bad loan blow up during FY17-FY19. The second wave’s impact has receded now, and SBI’s stressed assets have fallen enough for it to make 75% lower provisions than it did last year. The bad loan stockpile has dropped by 7.7% sequentially, recoveries and upgrades have climbed 49%, and fresh slippages are the lowest in three quarters.

The upshot is that SBI’s asset quality has shown a swift improvement which means future provisioning needs would be low. Note that despite lower provisions in the September quarter, the lender’s coverage ratio remains high, around 88%.

What’s more, SBI holds 6,181 crore, specifically towards pandemic risks that it is in no hurry to reduce. That gives the lender some insurance against a potential third wave impact. Yet another positive is that restructured loans are just 1.2% of total book, and special mention accounts that capture early stress have fallen sharply.

So Khara is justified in his optimism towards asset quality. However, balance sheet growth is a whole different story. Domestic loan growth for the September quarter was just 4.6%, the lowest in six quarters. The culprit was the corporate loan book which shrank for the third straight quarter. Khara said that there are enough signs that companies would be back to borrowing from the bank.

State Bank India has unused sanction term loan limits of roughly 2.5 trillion and another 2 trillion as working capital limits. “These are sanctions waiting to be drawn down," he said. Khara expects 10% loan growth for FY22 and said the corporate loan book would show positive growth from the current contraction. Retail loans continue to be the main driver, with a growth rate of 15%. However, it is clear that unless big companies come back as borrowers, SBI would have a tough time growing its advances. It remains to be seen whether a normalizing monetary policy and an upward bias in interest rates would slow down loan offtake in the coming quarters.

Loan growth is critical as it generates core income and even helps keep asset quality metrics intact. SBI’s cost of funds at 3.84% may look appealing, but a faster deposit growth doesn’t bode well for income. The lender’s investments in low-yielding government bonds have grown faster at 8% compared with a 6% overall loan book growth.

In short, SBI is losing money due to its liquidity. Khara is hopeful that companies will come and points to the metals sector’s capacity addition, among others. But will businesses facing pressure on profit margins due to a surge in input costs be open to borrowing and investing in capex? The jury is still out whether SBI’s optimism would come through this time. The 19% surge in the share price over the past three months against a more modest 10% rise in the broad Nifty perhaps shows that investors have faith in SBI’s optimism.

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