Shares of the country’s largest lender, State Bank of India, were hammered on Monday, after the central bank desisted from a rate cut. Investors pressed the sell button, as the bank had cut its lending rates by 50-350 basis points for loans to the farm and small and medium enterprises (SME) sector, days before the Reserve Bank of India’s mid-quarter review of its policy. With lending rates coming down in these categories and RBI refusing to budge, margins of the PSU bank would evidently come under pressure.
Though the management has conveyed that it is expecting to maintain net interest margin (NIM) at 3.75 per cent in FY13, analysts believe the current lending rate cuts might result in NIM contraction of 10-20 basis points. The market expects the bank’s net interest income, therefore, to come off in the current financial year. ICICI Securities expects net margin on the lending book to decline 12-15 basis points. However, Sharekhan believes the bank might maintain NIM at 3.7 per cent.
While the decision to cut lending rates before the RBI’s policy announcement may eat into margins, the big overhang all through FY12 has been rising slippages (fresh accretion of bad loans). The bank has conveyed to analysts that while it will continue to see slippages and restructuring, its net incremental slippages for the first quarter of FY13 are likely to be in the Rs 2,000-2,500 crore range. If the bank can achieve these numbers, ICICI Securities says it would contain incremental provisioning cost.
But SBI is expected to be relatively better off than the rest of the pack of public sector banks, as its exposure to stressed sectors is relatively lower and due to early recognition of non-performing loans. Its exposure to stressed state electricity boards (SEBs) and Air India is limited. According to Sharekhan, given the deterioration in the macro environment, the slippages and additions to the restructured book will continue in FY13, though at a slower rate compared to FY12. “The stress in the asset quality is mainly coming from the mid-corporate and SME sectors, which could contribute to slippages. Restructured loans could rise from the textile, iron and steel segments.” What the market finds comforting is that the bank has improved its credit monitoring systems and has a stressed assets management group to deal with large corporate NPAs.