SBI quality of earnings deteriorates

Markets reacted positively to bank's results because it posted lower than expected bad loans

Stocks have been reacting to analyst’s expectations of a result irrespective of the fact that the actual numbers are higher or lower than the previous period of comparison.

This is because the expectations are generally built in the price and any deviation from those numbers posted by the company would mean that the expectations were wrong and price should realign with reality.

However, the fixation to a few numbers does not capture the strength or the weakness in the number. It is only after a couple of days that the stock corrects itself and starts discounting the details as they start pouring out through media and analyst reports.

Similar is the case with SBI numbers. India’s largest bank posted a 35% drop in its net profit at Rs 2,375 crore much lower than an expectation of Rs 2,675 crore. However, markets reacted positively to its results because the bank posted a lower than expected bad loans.

Net non-performing asset (NPA) of the bank increased from 2.83% to 2.91%. Expectations were that the bank would undertake a major cleaning up exercise, something similar to what its erstwhile Chairman Pratip Chaudhari did when he took charge.

In absolute terms SBI’s net NPA has increased from Rs 29,990 crore to Rs 32,151 crore. At the gross level they have increased from 5.56% to 5.64% or from Rs 60,891 crore to Rs 64,206 crore on a sequential quarter basis. Part of the reason for lower than expected NPA is that the bank has restructured loans worth Rs 8,585 crore as compared to Rs 4,384 crore in the previous quarter.

During the quarter the bank has provided for Rs 3,029 crore during the September 2013 quarter, which was one of the main reason for the drop in profit as provisioning stood at around Rs 1,830 crore in the previous year.

As if rising NPAs and rising provisions were not enough, SBI’s cost to income has been steadily rising and now stands at 56.01% as compared to 52.76% in the previous quarter and 46.33% in the same quarter last year.

Further its return on assets has fallen down to 0.69% in the quarter down from 0.81% in the previous one and 1.07% in the same quarter previous year. Return on Equity too is down to 11.77% from 13.59% in the previous quarter and 18.18% last year.

Also, its cost of deposit, the cost at which it raises funds has moved higher to 6.32% from 6.25% and is like to increase further as the bank has recently raised deposit rates. To its benefit, SBI has managed to charge its customers higher, this is reflected in higher yield on advances at 10.18% as compared to 10.05% in previous quarter, but it is still lower than 10.87% in September 2012.

Inherent weakness continues in SBI’s numbers. The bank has managed to live up to expectations on some fronts but the weakness in the numbers will be more pronounced going forward. Given the current economic scenario, this weakness is likely to persist for some more time.