SBI: Market leader misses estimates but delivers the goods on asset quality

At Rs 838 cr, its Q4 net is a huge miss, though better than last year's loss. Yet, as SBI made full provisioning for Bhushan Power, Essar Power and Alok Industries, it cheered the Street

It isn't often that a bank of State Bank of India’s (SBI) size, despite missing estimates by a huge margin, gets rewarded by the Street. Positive commentary from SBI chairman Rajnish Kumar, and more importantly, the bank having more or less started FY20 on a clean slate, with large accounts being fully provided for in the March quarter (Q4), helped the stock close the week with three per cent gains. 

Analysts polled on Bloomberg expected SBI to post net profit of Rs 4,840 crore, taking cue from a strong Q3. At Rs 838 crore, Q4’s net profit is a huge miss, though better than last year’s loss. Yet, as SBI made full provisioning towards troubled names - Bhushan Power, Essar Power and Alok Industries, it cheered the Street. Of the Rs 38,540 crore exposure to accounts referred to National Company Law Tribunal for resolution, SBI has an average provision coverage of 93 per cent. About 40 per cent provisioning made towards Rs 1,125 crore of loans to IL&FS was classified as non-performing assets (NPA) in Q4. Total exposure to IL&FS is Rs 3,487 crore. Loan loss provisioning fell from Rs 24,080 crore to Rs 17,336 crore, helped by Rs 5,712 crore of recoveries. Q4’s slippages of Rs 2,284 crore was elevated due to its exposure to Jet Airways (Rs 1220 crore of slippages).

SBI guides for a sub-1 per cent credit cost for fresh slippages going forward, though much would depend on legal finality to cases pending for resolution. This should help overall slippages at 1.6 per cent in FY19 (lowest in eight quarters) to cool down off further. “Our balance sheet is fully repaired with a provision converge ratio of 79 per cent,” Kumar iterates.

Strong earnings and loan growth padded up SBI’s Q4. Net interest income of Rs 22,954 crore grew by 15 per cent year-on-year. Loans grew by 14 per cent well supported by retail and corporate borrowers (accounting for 43 per cent of loan book). Favourable triggers from all front lifted domestic net interest margin to three per cent, after nearly two years of being under pressure. 

Interestingly, gross NPA ratio down to 7.5 per cent from 10.9 per cent a year-ago (highest improvement posted by a bank in Q4) puts it at at par with the private lender – ICICI Bank. 

“The bank’s strong liability franchise and better capital position differentiates it from other public sector peers. Industry best cost of funds also aid lower asset side risks,” says Mona Khetan of Reliance Securities. It’s attractive 1.2x FY20 earnings makes for a good investment case.