 "Higher loan recoveries boost SBI's asset quality")
A sequential improvement in asset quality, better cost efficiencies and higher growth in non-interest income compared to the year-ago period were the key highlights of State Bank of India (SBI)’s results for the quarter ended March. As a result, the decline in net profit (down 7.8 per cent at Rs 3,041 crore) was lower than the estimated 15 per cent. The SBI stock rose to a year’s high of Rs 2,775, before closing at Rs 2,755 on the BSE, up 9.7 per cent.
SBI, which has been struggling to keep its asset quality under control in recent quarters, surprised the Street with gross non-performing assets (NPA) and net NPA falling sequentially to 4.95 per cent (down 78 basis points) and 2.57 per cent (67 basis points), respectively. At Rs 61,605 crore, actual gross NPAs were about 10 per cent lower than estimated, driven by two-fold and four-fold sequential rises in loan recovery and upgrades, respectively. While recoveries were driven by a three-fold improvement in agri recoveries, all other segments (except small and medium enterprises, for which recoveries rose only 11 per cent) witnessed manifold improvements in this metric.
SBI, which has been struggling to keep its asset quality under control in recent quarters, surprised the Street with gross non-performing assets (NPA) and net NPA falling sequentially to 4.95 per cent (down 78 basis points) and 2.57 per cent (67 basis points), respectively. At Rs 61,605 crore, actual gross NPAs were about 10 per cent lower than estimated, driven by two-fold and four-fold sequential rises in loan recovery and upgrades, respectively. While recoveries were driven by a three-fold improvement in agri recoveries, all other segments (except small and medium enterprises, for which recoveries rose only 11 per cent) witnessed manifold improvements in this metric.
Fresh slippages were 30.5 per cent lower at Rs 7,947 crore, compared to the December 2013 quarter. For the March 2014 quarter, the bank witnessed a fall of Rs 6,194 crore in gross NPAs. The mid-corporates segment, again, contributed the most to incremental slippages — Rs 6,463 crore —, while that from all other segments were under check. SBI restructured loans worth just Rs 7,636 crore, lower than the management’s forecast of Rs 10,000 crore.
Provisions for bad and doubtful loans stood at Rs 5,884 crore (up 48.1 per cent), the most in the past few quarters, as the bank stepped up write-offs (including NPA sale to asset reconstruction companies).
While the improvement in asset quality was expected, given the new managing director had indicated the bank would increase its focus on improving asset quality and cost efficiencies, the gains have been much more than the Street’s expectations.
Sustainability of asset quality is vital. SBI’s gross NPA ratio is still among the highest for top public sector banks; the bank will have to work hard on this front.
Saikiran Pulavarthi, banking analyst, Espirito Santo Securities, says, “SBI’s NPA ratios have improved meaningfully, on a sequential basis, leading to Friday’s stock rally. However, we believe asset quality improvement is highly contingent on revival in growth in gross domestic product and, therefore, might take some time.”
Meanwhile, the 16.5 per cent year-on-year rise in net interest income, at Rs 12,903 crore, was slightly lower than analysts’ expectations, but continued traction in fee income (up 15.3 per cent at Rs 4,467 crore) was positive. Though the year-on-year growth in loans was lower than 16-21 per cent through the past seven-eight quarters, it was healthy (15.4 per cent), driven by retail (home loans), infrastructure and large companies. On the cost front, a marginal fall in employee costs and a slower increase in other expenses aided growth in operating profit.
The bank’s return on equity ratio for FY14 fell to 10.49 per cent from 15.94 per cent in FY13, following recent fund-raising. Though better placed than smaller peers, analysts believe SBI will have to raise more funds to comply with Basel-III norms. While most analysts remain positive on SBI, current valuations appear to be full.
Provisions for bad and doubtful loans stood at Rs 5,884 crore (up 48.1 per cent), the most in the past few quarters, as the bank stepped up write-offs (including NPA sale to asset reconstruction companies).
While the improvement in asset quality was expected, given the new managing director had indicated the bank would increase its focus on improving asset quality and cost efficiencies, the gains have been much more than the Street’s expectations.
Sustainability of asset quality is vital. SBI’s gross NPA ratio is still among the highest for top public sector banks; the bank will have to work hard on this front.
Saikiran Pulavarthi, banking analyst, Espirito Santo Securities, says, “SBI’s NPA ratios have improved meaningfully, on a sequential basis, leading to Friday’s stock rally. However, we believe asset quality improvement is highly contingent on revival in growth in gross domestic product and, therefore, might take some time.”
Meanwhile, the 16.5 per cent year-on-year rise in net interest income, at Rs 12,903 crore, was slightly lower than analysts’ expectations, but continued traction in fee income (up 15.3 per cent at Rs 4,467 crore) was positive. Though the year-on-year growth in loans was lower than 16-21 per cent through the past seven-eight quarters, it was healthy (15.4 per cent), driven by retail (home loans), infrastructure and large companies. On the cost front, a marginal fall in employee costs and a slower increase in other expenses aided growth in operating profit.
The bank’s return on equity ratio for FY14 fell to 10.49 per cent from 15.94 per cent in FY13, following recent fund-raising. Though better placed than smaller peers, analysts believe SBI will have to raise more funds to comply with Basel-III norms. While most analysts remain positive on SBI, current valuations appear to be full.