SBI: Asset quality stable, but sustainability a question

Meaningful improvement in asset quality and overall growth still a few quarters away

At a time when most public sector banks displayed disappointing performance on the asset quality front, with some even reporting a sharp decline in profits, State Bank of India (SBI)’s stable asset quality in the December 2014 quarter was a pleasant surprise. The SBI scrip rose eight per cent in Friday’s session.

The operational performance was also good, except for the single-digit net interest income (NII) growth, which is a function of the subdued economic environment. Margins were also stable.

The bank’s gross and net non-performing assets (NPA) ratios remained largely stable sequentially, but were down visibly on a yearly basis. Gross NPA ratio stood flattish sequentially at 4.9 per cent in the quarter against 30-60 basis-point sequential increase witnessed by the Punjab National Bank and Bank of India.

Notably, all three banks posted a sharp fall of 21-44 per cent in their incremental restructuring on a sequential basis.

The question is whether this trend will sustain in the current quarter. Closure of the restructuring window with effect from April 2015 might lead to higher restructuring of corporate loans and thus asset quality pressure in March 2015 quarter for many banks. The strong restructuring pipeline of Rs 5,000-5,500 crore given by SBI provides some indication. Further, the SBI management indicated that there was a pause in recovery and upgradation in the quarter, which stood at only Rs 667 crore versus Rs 7,182 crore in the first half of FY15 and Rs 2,635 crore in the September 2014 quarter.

Vaibhav Agarwal, analyst, Angel Broking, says: “SBI’s provisions and slippages were higher than expected, but better than peers. However, we remain watchful on public sector banks and believe meaningful improvement in asset quality is likely only in FY16.”

Thanks to a 37.6 per cent year-on-year (y-o-y) rise in provisions to Rs 4,717 crore, SBI’s net profit at Rs 2,910 crore was far lower than consensus Bloomberg estimates of Rs 3,369 crore. While the y-o-y profit growth looks strong at 30.3 per cent, part of it is driven by a low base. In the December 2013 quarter, net profit fell 34.2 per cent y-o-y to Rs 2,234 crore.

Bottom-line growth was also aided by strong growth in non-interest income (up 24.3 per cent to Rs 5,238 crore), with a large part of it on account of a four-fold rise in non-core treasury gains to Rs 920 crore. Fee income grew at a decent pace of 10.7 per cent to Rs 3,291 crore, and was restricted by lower letters of credit to the oil sector and low credit off-take.

A loan book of 6.9 per cent was in line and driven by 20 per cent growth in corporate book even as retail growth at 12.7 per cent was similar to that in recent quarters. The SBI management believes loan growth will remain soft in the next two quarters as it consolidates lending to small and medium enterprises and agriculture segments. Pick-up in private sector capex is still two-to-three quarters away and will be a key catalyst.