SBI share price reflects state of banking in India

Rising NPAs, bond yields to cap quarterly profit at Rs 2,000 crore

Share price of the country’s largest lender, State Bank of India, has fallen by 26% to Rs 1,475 since July. Unlike many other heavyweights which have become attractive after the recent beating, not many believe that SBI’s shares are attractive despite the fall.

The ratio of impaired loans for the entire banking sector has jumped 75 basis points to 10% at the end of June. If this be the case, then the going is only going to worsen for the country’s largest lender.

With the Reserve Bank of India’s recent tightening and economic growth plummeting to 4.4%, the banking sector’s woes are only expected to rise.

This trend has become obvious Morgan Stanley expects impairments to be meaningfully higher than their base case estimate of 12.5% by FY15. Given that companies will continue to struggle in a difficult macro-economic environment, analysts expect corporate lenders to struggle going forward.

SBI’s first quarter performance provides evidence of such a trend playing out. In the first quarter, SBI shocked the market with its slippage (fresh accretion of bad loans) of Rs 13,760 crore, which was way ahead of the market’s estimates.

Even though SBI indicated that in the next quarter slippages to the tune of Rs 2,000-2,500 crore may be upgraded, analysts believe that the process may be slower than expected. The management has not given any guidance for slippages in the current fiscal as it believes that asset quality pressures will persist due to the slowdown.

According to Antique Stock Broking, the bank’s total restructured book stood at 3% of advances at the end of the first quarter. The corporate debt restructuring pipeline for the second quarter stands at Rs 10,000 (related to iron & steel, road and power sector), adds the brokerage.

The bank’s profitability is also expected to take a hit in the coming quarters on rising expenditure and higher bond yields. Morgan Stanley does not expect the bank’s average profit after tax over the next three quarters to be materially higher than Rs 2000 crore.

“This will be driven by weaker asset quality (51% coverage and huge impaired loan formation); likely fall in net interest margins (falling spreads/loan-deposit ratio); rising opex and higher bond yields (MTM losses of Rs 1,300 crore according to management).”