SBI: Earnings outlook to get better on lower credit costs

Net interest margins to remain stable, core operating profit expected to grow 32% y-o-y in Q2

The country's largest bank, State Bank of India, is finding favour with analysts again, as its earnings are expected to improve sharply. Several factors are expected to drive the bank's earnings growth both in the near-term and long-term. For starters, the bank's new management, claim analysts, has been focused on improving fee income, which would contribute to the second quarter earnings this fiscal. Motilal Oswal Securities expects core operating profit to grow 32 per cent year-on-year, which would be driven by healthy net interest income growth, strong fee and control over operational expenditure. The bank's net interest margins are expected to be remain stable at 3.3 per cent levels.

SBI's earnings outlook is not just looking robust in September quarter of FY15, but also from the long-term point of view. High credit costs have been impacting the bank's earnings for the last few years. According to UBS Securities, the bank's credit costs have increased from average of 70 basis points over FY07-10 to 140 basis points over FY11-14. The pressure on earnings is expected to ease, as credit costs are likely to gradually decline to 90 basis points FY17. With a likely pickup in the capex cycle, the brokerage expects revenue to improve at a 14 per cent CAGR over FY15-17. The Street expects the bank to deliver an earnings growth of 30 per cent CAGR over FY15-17.

Analysts have turned positive over the past month because the bank's credit and deposit growth is superior than the industry's. Once, economic recovery accelerates, the bank will be able to meet with higher loan demand, thanks to a strong deposit franchise and capital base. JPMorgan, which has upgraded the stock to overweight from neutral on 26 September, says: "This puts it at an advantage to other peers because it will be in a position to leverage the upturn in terms of growth. This will be critical to driving revenue growth and absorbing the credit cost pressures that are likely to persist for a few more quarters."

Accretion of bad assets, undoubtedly, are a problem for the bank, but the situtation has not worsened in recent quarters. For starters, sequentially, the bank has not seen any sharp uptick in bad loans. In the first quarter, the accretion of bad loans moderated both sequentially and annually. Given that the pipeline of restructured loans has declined continuously, Morgan Stanley expects that the impaired loans formation to materially get slower over the next few quarters.