State Bank of India’s results for the last quarter of 2011-12 and the whole financial year have provided a much-needed pick-me-up, no matter how fleeting, to the gloomy mood in the financial sector. On Monday, SBI’s share price saw substantial upward movement after major foreign brokerages, including CLSA and Bank of America-Merrill Lynch, upgraded it to a “buy” rating. This comes after a massive rise in net margin for the quarter from virtually zero a year ago to a respectable 11.9 per cent, explained by the huge provisioning that was made, along with a change of guard at the top, last year. This was necessary to make up for arrears in provisioning, not just in terms of regulatory norms, but also for income tax. On a more comparable basis, net margins have also improved sequentially, in relation to the previous quarter, by 100 basis points. Thus, the results are not a statistical blip; they have substance. This is also borne out by the fact that net interest income, which is unrelated to provisioning, has gone up by a substantial 37.5 per cent this quarter compared to a year earlier, in line with net interest margin improving by 53 basis points. The latter, in particular, is a “dream”, according to the chairman, Pratip Chaudhuri, who is satisfied that the bank has been able to properly navigate the interest rate changes over the past year. Revenue growth has outstripped growth in expenses, he has added, enabling operating profit for the quarter to register a huge 58 per cent rise on a year-on-year basis.
All improvements in financial performance are welcome, but SBI’s latest numbers commend themselves for two more reasons. One, having come after substantial provisioning, they depict a much truer picture of the health of the institution than earlier. Two, the bank has done better even as the overall economy has moved in the opposite direction. This has been made possible by improvement on non-performing assets. In the last quarter, gross non-performing assets actually fell by a small amount, compared to the sequential previous quarter. A significant value of assets has been upgraded, more cash recoveries have been made and additions to non-performing assets have been lower. This improvement in performance will help the bank in combating the tough year that lies ahead when worry over asset quality will dominate in a declining economic environment.
An additional challenge is the growth target the bank has set for itself. After growing advances by 16 per cent in the last year, the bank aims to grow by the same rate or more in the current year. In the last quarter, despite a 25 per cent rise in net profit sequentially, return on assets, a crucial measure for banks, has gone down because of a rapid growth in assets. With the economy under stress, enterprises across the board will be working under duress, leading to an inevitable decline in asset quality. In this situation, the bank – being both large and in the public sector – will be under tremendous pressure from the finance ministry to keep accommodating firms so that they do not cease operations and add to unemployment and social distress. Thus, the best that the financial sector can expect the bank to do in the year ahead is not lose control of its bottomline altogether.