SBI: Q1 throws up some surprises

Management and analysts believe growth in the near term will remain soft

The State Bank of India (SBI) posted weak operational results for the June quarter (Q1), even as provisions for non-performing assets (NPAs) fell and asset quality ratios stood steady. While the net interest income (NII) growth of 3.6 per cent was the lowest over the past two years, domestic loan growth of 5.4 per cent, too, was at a multi-year low. The weak NII growth can be partly attributed to the fact that interest income growth was slower than the increase in interest expenses.

Weak credit demand from corporates is a key reason for the slowdown and will improve gradually once investments by India Inc gather pace. Retail loans (one-fifth of domestic loans) grew 15 per cent in Q1 but could not compensate for falling mid-corporate book and flattish SME book. Analysts say benign input costs (metals, energy, amongst others) have also reduced corporates’ need for working capital loans. Notably, in the absence of investments by India Inc, SBI and other banks’ corporate loan books were driven by working capital loans.

Commentary from the management and analysts suggests growth in the near-term will remain soft. Weak topline growth, however, is likely to reflect on operating profits and margins as well. In the June quarter as well, SBI's operating profit grew 4.7 per cent to Rs 9,202 crore. The trend in profits and NII growth is also partly due to the two cuts in base rate in the quarter. As a result, the domestic net interest margin contracted 25 basis points (bps) over a year to 3.3 per cent. Analysts believe, in absence of any uptick in credit growth, further base rate cuts will impact SBI's profitability significantly, unless the bank is able to proportionately lower its cost of funds.

Higher other income and lower tax rate, however, aided net profit which grew 10.3 per cent over a year to Rs 3,692 crore, ahead of the Bloomberg consensus estimate of Rs 3,400 crore.



Among positives, healthy fee income growth of 12.9 per cent to Rs 3,202 crore fuelled other income growth. Though slippages increased on a sequential basis, among key reasons for the stock’s fall, the management says there is a seasonality element to June quarters. On a year-on-year basis though, slippages in Q1 declined due to improving mid-corporate book (about 40 per cent of gross NPAs) and recoveries.

While the near-term outlook is benign, SBI’s large size and penetration makes it a proxy to the economy. Thus, it is highly levered to improving macro factors. It has also done better than its PSU peers. Moreover, at 12% Capital Adequacy ratio (as per Basel III norms), SBI remains well capitalised to tap into any growth opportunities. Thus, most analysts remain positive on the stock. Trends in the September 2015 quarter will be key in determining the full year growth for SBI.