Wait-and-watch mode on for SBI | Mint

Wait-and-watch mode on for SBI

(Photo: Mint)
(Photo: Mint)


  • The largest public sector lender’s September quarter (Q2FY24) results announced on Saturday have not moved the needle, with the shares closing flat on Monday.

After gaining 33% in 2022, shares of State Bank of India (SBI) have lost 6% in value so far in 2023, lagging the Nifty Bank’s marginally positive returns. The largest public sector lender’s September quarter (Q2FY24) results announced on Saturday have not moved the needle, with the shares closing flat on Monday.


(Graphics: Mint)
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(Graphics: Mint)

For one, the ongoing moderation in loan growth momentum is bothersome (See chart). In Q2, domestic loan growth stood at 13.2% year-on-year thanks to increased traction in high-yielding SME loans and robust retail loans, particularly unsecured loans. Loan growth has been tapering for the past four quarters, at least.

Within retail loans, Xpress credit book continued to expand at a faster pace in Q2, while mortgage and other retail loan growth moderated a bit, the management said. On the other hand, corporate loan growth was relatively subdued. Here, the management is exercising caution on both pricing of loan and quality of customers. Nonetheless, the management highlighted that the corporate pipeline remains strong with 3.4 trillion worth of proposals and 1.4 trillion worth of loans pending for disbursements.

In FY24, the SBI management anticipates loan growth for the industry to be strong at 16-17%. SBI is expected to underperform, clocking about 14% loan growth. In an earnings call, the management stated that they would like to remain conservative on loan growth guidance and would aim to surprise on the upside. “The nature of the loan portfolio suggests that the intensity of this credit cost is unlikely to be as challenging as it was during the corporate cycle. The bank is growing its loan book a lot more cautiously, which gives greater comfort," said a Kotak Institutional Equities report on 5 November.

That said, deposits need to catch up. SBI’s domestic deposit growth was nearly 12% year-on-year, thanks to term deposits. The bank has kept its term deposit rates broadly unchanged lately. The management is of the view that a substantial part of the re-pricing has already happened. However, the remaining re-pricing, which is likely by the end of the next quarter, may lead to 3-5 basis points (bps) of compression in domestic net interest margin (NIM) from the current level.

Even so, investors can seek solace from the fact that NIM is showing signs of stabilizing. Reported domestic NIM stood at 3.45% in Q2 versus 3.47% in Q1. In comparison, a slew of peers in the public and private banking sector have seen a higher sequential drop in NIMs. For SBI, the contraction in NIM was contained by better loan yields and slower expansion in deposit cost. Further, the management commentary on NIM is encouraging as it expects the parameter to remain largely stable in the second half of FY24.

Meanwhile, elevated operating expenses were a spoiler in Q2FY24. Plus, wage provision shot up. The outlook on the bank’s profitability also hinges on the pace of branch expansions and investment in digital initiatives. Digital continues to be an important customer acquisition engine for the bank across assets and liability products, the management said.

Further, SBI’s asset quality was healthy in Q2, but the pace of credit growth and movement in cost of funds remain key triggers. “SBI’s better outcomes on asset quality would ensure that the bank is set to deliver 15% return on equity in the near-term. That said, the rerating from hereon could be slower and will be contingent on consistent core delivery and macro tailwinds," said Elara Securities (India) in a 5 November report. Thus, SBI’s investors are likely to be on a wait and watch mode for some time.

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