SBI: Growth at the cost of margins

State Bank of India’s net interest margin (nim) came off fairly sharply during the March 2009 quarter as it grappled with lower lending rates—- resulting from cuts in the prime lending rate—- and the impact of high cost deposits. With yields on both assets and investments lower by about 100 basis points, the nim is estimated to have dropped by around 50 basis points sequentially to 2.3 leaving the net interest income flat.

It was just as well that other income posted a spectacular rise of 68 per cent on the back of treasury income of Rs 1,500 crore, because that accounted for 29 per cent of the operating profit. In fact, the bottom line growth of 46 per cent was almost entirely driven by treasury income, the growth in fee income being a robust 34 per cent. Although the share of bulk deposits is coming off, SBI continues to borrow more than it’s lending —-despite strong loan growth of 30 per cent, the credit-deposit ratio fell during the quarter.

As such the pressure on margins could continue. Also, gross npls were up 23 basis points sequentially to 2.84 per cent—-a rise of 2,270 crore though much of this is due to the Dabhol account and could be upgraded soon, with the bulk of the balance relating to the international book. However, net npls have risen 40 basis points sequentially and what’s worse, the coverage ratio is down to 38.7 per cent —-way too low in these difficult times.

Asset quality remains a concern given that the bank grown the loan book aggressively in the past few years— the quantum of restructured assets was Rs 8,300 crore and although majority of the restructuring is complete, Merrill Lynch estimates that there could be a 50 per cent jump in gross npls to rise to 3.7 per cent in 2009-10. Analyst are pencilling in flat earnings growth in the current year.