More concerns than positives in SBI's Q3

Higher treasury profits, weak credit growth and continued asset quality woes are key worries

State Bank of India (SBI)'s results for the December 2016 quarter (Q3) were helped by a host of factors such as strong surge in treasury gains, profit on stake sale in the life insurance business, the Reserve Bank of India (RBI)'s reprieve towards recognition of bad loans as well as low net profit base of the December 2015 quarter. All these factors enabled SBI to report better-than-expected net profit of Rs 2,610 crore (up 134 per cent year-on-year) versus the Bloomberg consensus estimate of Rs 2,510 crore. But, there are reasons to worry as well.

For one, in the year-ago quarter, RBI had mandated all banks to step up provisioning for bad loans under the asset quality review (AQR) process, which in turn had pulled down the profit (nearly 62 per cent) as provisions surged manifold. Two, as analysts at Emkay Research estimate, "Adding back Rs 2,000 crore worth of assets affected under RBI dispensation, slippages would have been higher at Rs 12,185 crore." The bank's fresh slippages stood at Rs 10,185 crore in Q3, or 1.5 per cent lower sequentially. A little over a fourth of SBI's slippages were also from outside the watch list indicating heightened asset quality stress. This could be a key reason why the bank has continued to step up provisioning for standard assets which are seeing some stress. Clearly, asset quality woes are far from over as of now.

Another concern was that SBI's domestic loans grew just 4.2 per cent with demonetisation adding to the pressures arising from stagnant credit demand from corporates. This loan growth is at a multi-quarter low and management expectations of a 6.5 per cent growth this financial year indicates it is unlikely to improve much in the ongoing quarter. Though the management attributed this weakness to demonetisation, there were pressures in the mid-corporate and small and medium enterprise segments as well. The retail segment, though, continued to grow well. Low base of this financial year, coupled with rising government spending in sectors such as mining, roads, railways, however, could push SBI's loan growth to 11 per cent in FY18.

SBI's NII growth of 7.7 per cent in Q3 was at a multi-quarter high and fee income too grew at a healthy clip in most segments, except loan processing and transaction fees. Though the net interest margin came down marginally to 3.03 per cent on the back of falling yields, the bank is confident of keeping it in a tight band going forward. But, if other income is excluded, SBI's pre-provisioning pre-tax profit was down 15.8 per cent year-on-year at Rs 2,881 crore.

Merger of associate banks with itself in the next financial year, listing of life insurance business and possible increase in valuations of general insurance subsidiary will also influence the SBI stock.