SBI net may fall 9% in Q4

Consensus among brokerages estimates is an 8.7% fall in net profit and a 1.4% decline in net interest income

State Bank of India (SBI) is likely to put up a poor show for the March quarter, in the results it is set to announce tomorrow. The consensus among brokerages estimates is an 8.7 per cent fall in net profit and a 1.4 per cent decline in net interest income (NII). Loan growth of 18-20 per cent will be overshadowed by NII compression, driven by weak margins.

Analysts believe the bank, the country's largest, will be a key beneficiary of housing loan transfers, given its lowest rates. Flattish fee income will be compensated by higher trading gains (Rs 430 crore), leading to a nine per cent increase in non-interest income. The net interest margin is expected to be stable sequentially at 3.4 per cent but could witness a 60 basis points contraction over the March 2012 quarter.

SBI is likely to provide Rs 800-900 crore towards pay rises for the five months ending March 2013. Higher provisioning for bad loans will further pull down net profit. Analysts expect gross slippages to be flattish on a sequential basis at Rs 7,000 crore, though restructuring could rise (led by the Suzlon account).

The silver lining could come in the form of improved recoveries, as banks are now allowed to upgrade accounts having satisfactory performance for two years. "Despite an expected decline in earnings, SBI could surprise positively on lower-than-expected provisioning," believes Ashish Gupta, research analyst at Credit Suisse.

Sustainable improvement in asset quality trends will be a significant trigger. The stock is trading at 1.3 times the FY14 estimated adjusted book value. This seems inexpensive, as the stock has traded at average valuations of twice the one-year forward book value.

"We look for evidence of SBI's ability to sustain asset quality improvement. We retain our 'Sell' stance, because the stock offers no margin of safety on continued deterioration in asset quality," says Krishnan ASV, analyst at Ambit Capital.