Asset quality shines through SBI's Q1

Bank on better footing than most PSU peers on asset quality, capitalisation and growth parameters

State Bank of India (SBI) has done it again. After surprising the Street with its relatively lower watch-list of potential bad loans in the March 2016 quarter, the bank showed a marked improvement in most asset quality parameters in the June 2016 quarter (Q1). This is important given that most of its peers in the public sector and some in the private banks space witnessed elevated asset quality stress in the quarter with management commentaries, too, remaining cautious.

For SBI, the key indicators of asset quality - slippage ratio, provisions and credit costs - improved sequentially. The sequential trend reflects actual trends witnessed in the quarter and, hence, are better indicators. Compared to the year-ago quarter, these numbers increased but only marginally. Thus, slippage ratio (fresh bad loans divided by opening standard assets) fell 675 basis points sequentially to 2.3 per cent and was 2.2 per cent in the year-ago quarter.

Similarly, the bank's credit costs, too, fell 196 basis points sequentially to 1.7 per cent and was one per cent in the year-ago quarter. Loan loss provisions fell 47.8 per cent sequentially to Rs 6,340 crore reflecting some easing of asset quality pressures. In fact, the bank's watch-list of Rs 31,300 crore for this financial year is only 2.1 per cent of its total loans. Going forward, too, the management remains confident of doing well on the asset quality front.

Even as net profit fell 32 per cent year-on-year to Rs 2,521 crore, it was ahead of Bloomberg consensus estimate of Rs 2,471 crore. Part of this beat, though, can be attributed to gains from sale of investments, higher dividend income as well as forex income. All these factors pushed the growth in non-interest income to 44.2 per cent at Rs 7,335 crore. The bank posted a healthy loan growth of 11 per cent in the quarter and expects this metric to be 12 per cent for the full year.

The Street cheered the bank's healthy performance and pushed up the SBI stock by seven per cent to Rs 243 on Friday. Even after the gain, the stock trades at inexpensive valuation of one time FY17 estimated consolidated book value. Going forward, the stock will move in tandem with announcements surrounding the merger of associate banks and change of guard at the bank after October.

Any uptick in economic growth will be a key positive and unlike other public-sector banks, SBI is well poised to tap the opportunities arising from such an uptick.