SBI warns bad debt can worsen even as its profit beats estimates

State Bank of India warned that the ongoing coronavirus pandemic would lead to more bad debt, even as the nation’s largest lender reported better-than-expected profit after setting aside fewer provisions for problem loans.

The bank’s net income jumped 52% to 45.7 billion rupees ($610 million) for the three months to September, beating the 36.9 billion rupee average estimate of 11 analysts surveyed by Bloomberg.

While its bad loan ratio fell slightly to 5.28%, from 5.44% at the end of June, SBI expects a further 200 billion rupees of loans to sour over the next six months as the pandemic continues to impacts borrowers. This would result in 600 billion rupees of problem loans, or 2.5% of its loan book, at the end of March 2021.

“Going forward we might see some kind of stress in small and medium enterprises, and in the agriculture sector,” Chairman Dinesh Khara said during a post-earnings call.

Despite the expectations, SBI set aside 101.2 billion rupees in provisions this quarter, down from 125 billion rupees at the end of June and 131.4 billion rupees a year ago. Khara said the bank was adequately covered and “much ahead of the curve” on provisions.

Shares in SBI closed up 1.1% in Mumbai on Wednesday, beating a 0.9% rise in the broader Sensex index.

Lending Crisis

Lenders in the world’s second-most populous country -- like others globally -- have been hit hard after a nationwide lockdown forced businesses to close, impacting demand for credit and borrowers’ ability to repay. Banks came into the year already weakened by a two-year-old shadow lending crisis and are now struggling with the worst bad loan ratios among major nations.

SBI, which accounts for more than a fifth of loans in India’s banking sector, is a key indicator of the health of the country’s economy that’s set for a historic contraction this financial year.

Still, there are early signs of consumer-led recovery with banks seeing a pick up in retail loans ahead of the country’s festive season. SBI increased its loan-growth estimate for the full year to more than 8% from an an earlier estimate of 6%-7%, Khara said.

“Retail will continue to be a major driver for growth going forward,” he said. The chairman doesn’t see any “major challenge on loan delinquencies” for retail loans given that most of the bank’s customers work for government or quasi-government companies.

SBI’s bad-loan ratio for loans to retail consumers fell to 0.83% at the end of September from 1.10% three months earlier.