SBI results: Bank's September-quarter earnings a Diwali gift for investors

The September quarter (Q2) results of the State Bank of India (SBI) came as an exception to the gloom in the economy. Net interest income grew by 17.7 per cent year-on-year (YoY), which is strong considering its scale, and was also better than what its private peers have posted so far. 

Helped by the stake sale in the SBI Life Insurance Company, which bumped up income by Rs 3,500 crore, the profit before tax grew by 179 per cent YoY and exceeded Street expectations. What seems to have pleased investors the most, and helped the stock gain over seven per cent on Friday (the highest gains that the SBI stock has seen in a year), is the easing of asset quality. 

Slippages or loans turning bad nearly halved on a sequential basis from Rs 16,212 crore in the June quarter to Rs 8,805 crore in Q2FY20, and this is the first time in many quarters that slippages are easing by such a margin. 

The formation of absolute gross non-performing assets (NPA) reduced to Rs 1.61 trillion crore in Q2, down from Rs 2.05 trillion a year-ago. This bodes well, and given that September is the second quarter demonstrating an easing of asset quality pain, these parameters suggest that the bank is past the worst period of asset quality stress. 

Another reassuring aspect is the gross NPA ratio melting by 34 basis points (bps) sequentially to 7.19 per cent and net NPA ratio declining to 2.79 per cent in Q2 from 3.07 per cent a quarter-ago.

The bank maintained its slippages ratio target for FY20 at 2 per cent, despite it being 2.18 per cent in Q2 (down 65 bps sequentially). "The normalised full year run-rate of slippages would be Rs 8,000 – Rs 8,500 crore,” said Rajnish Kumar in a media call. 

While this alludes confidence that asset quality should perhaps get better from hereon, one needs to be mindful of the Rs 44,360 crore worth inter-creditor agreements entered into by the bank, of which Rs 16,822 crore of loans are still classified as standard assets. If resolution doesn’t progress as anticipated in these accounts, an addition to stress cannot be ruled out. The bank, however, expects some big recoveries from accounts closer to resolution.

Asset quality aside, the bank’s ability to grow its financials profitably was also evident in Q2 ,with domestic net interest margin increasing from 2.8 per cent a year-ago to 3.22 per cent. This is a positive, as it is coming when some of its private peers are facing challenges on the same aspect.

Overall, an evident improvement in numbers and benign valuations (1.1x FY21 book) makes SBI an attractive pick.