State Bank of India, the country’s largest lender, managed to beat earnings estimates but that’s the last thing on the mind of investors and analysts. While the company reported a 137 per cent increase in net profit, the bank’s fresh accretion of bad loans at Rs 10,800 crore stood out like a sore thumb. The sharp increase in bad loans has shocked the market, as this is in variance with what the bank said it expected. Moreover, the increase has been driven by deterioration in three corporate accounts, which added up to Rs 3,500 crore.
However, analysts say the bank seems confident of upgrading at least two of these accounts in the coming quarters. A hydro-electric power plant is stressed as it has not got environmental clearances. As soon as the clearances come about, the account would be upgraded. Similarly, the second account, in the construction sector, has been hit as the borrower is not being paid for a project where it was a sub-contractor. One pharmaceutical/biotech account is what analysts expect could deteriorate.
This increase in the stressed asset levels is a sign of the times. As growth slows and rates remain high, corporate clients are finding it difficult to service debt. It also indicates that banks will find it difficult to get a fix on asset quality, as is the case with SBI. Sonam Udasi, head of research at IDBI Capital, says SBI’s numbers indicate the credit environment could deteriorate and the banking sector is not out of the woods. Banking will remain a value sector, till the stressed asset cycle plays out completely. The bank has also not given any guidance on agri-loans, given that rain has been deficient this year. Given the run-rate in slippages, analysts believe the bank would do well to increase its provision coverage ratio from current levels, which in Q1 came down to 57 per cent from 60 per cent in the previous quarter.
What is more worrying is also the bank’s aggression in cutting loan rates. Given the fall in margins and higher slippages, the market would like to get a fix on the bank’s strategy. Though the bank has guided for a net interest margin (NIM) of 3.7 per cent in the coming quarters, analysts think this would be difficult to achieve, given it’s strategy. According to Emkay Global, though the net interest income grew by 14.6 per cent year-on-year to Rs 11,120 crore, aided by 19 per cent YoY growth in advances, NIM contracted sharply by 37 basis points to 3.2 per cent against the guidance of flat margins or very low dip. The only positive has been the size of the restructured assets, which came in at Rs 540 crore in Q1FY13.