Growth will be a bigger challenge in FY14: SBI

Goldman Sachs stays neutral on SBI, notes NPAs peaked

The worst may be over for State Bank of India (SBI), the country’s largest lender, so far as asset quality is concerned. According to broking firm Goldman Sachs, which had a meeting with divisional heads of SBI in the first week of December, slippages are likely to stabilise or fall going forward and net non-performing asset of the bank may actually fall by the end of March to 2–2.5% as compared to 2.4% of September-end.

However, growth is likely to emerge as bigger challenge for the lender in the next financial year, SBI indicated the analysts.

"In an investor meeting organised by us with the key divisional heads at SBI, management indicated that NPLs are near a peak but growth will be a bigger challenge in FY14," Goldman said in a note. The brokerage maintained neutral rating for SBI.

Improving in asset quality may also prompt the lender to increase its provision cover and also make provisions for wage hike.

"While NPL [non-performing loans] may remain elevated in the near term, we think a decline would be positive for SBI, as it would reduce stress on the balance sheet, which in turn would lead to an improvement in profitability," it said.

On the growth front, demand from large corporate loans is still not there and the lender is not focusing on mid-corporate segment due to high stress of that portfolio. Growth for the lender is expected to come from home and auto loans.

Mortgages will be the key driver for SBI’s growth in the current financial year which is expected to clock 25-30% growth. SBI has been home loan approvals increasing to Rs 150 crore per day from Rs 65 crore about two months back. The number of applications received by SBI has also doubled in the last couple of months.

Auto loans, which grew by 28% in the first half, are expected to continue the momentum.

The growth in retail assets comes on the back of lower lending rates, improved processes and switchover of customers from other banks to SBI.

"The bank has reduced its loan processing time to 2-3 days for projects that have already been approved, as this requires only KYC [Know your customer] checks. In contrast, the bank requires around 10 days’ processing time when both project and KYC checks require approval. Previously, processing took as long as 20-30 days," the note said.

Bad assets from the home loan segment for SBI, however, is higher than the housing finance companies, Goldman Sachs said, which is due to smaller value loan giving priority sector status, which constitutes 65% of the bank’s home loan book.

The small and medium enterprise sector, which has seen contributing stress to SBI, will remain a key area, nevertheless. The SME loan portfolio grew 13.3% in April-September and the bank indicated it is seeing growth in the food processing, hospitality, auto ancillary and auto components sectors.

"The bank has also tightened its lending standards to reduce stress and has been insisting on audited balance sheet from the SME to provide enhancements," the report said.