SBI likely candidate for earnings downgrade

Street estimating full-year net profit at Rs 12,800 cr, which bank may not be able to meet as it has clocked Rs 5,600 cr in H1

 

State Bank of India (SBI) has not sprung a nasty surprise on the market with its second-quarter numbers. Though the country’s largest lender’s 35 per cent fall in net profit is much worse than the market’s 25 per cent estimate, analysts are not losing sleep over the bottom line, as asset quality is a bigger concern.

The 35 per cent year-on-year fall in net profit (Rs 2,375 crore) is due to higher provisioning and operating expenses. Analysts believe with the bank reporting a net profit of Rs 5,600 in the first half of FY14, earnings downgrades are a given.

On the asset quality front, too, the bank did not spring any nasty surprise. Unlike the first quarter, when SBI reported a sharp uptick in slippages (fresh accretion of bad loans), the second quarter was mostly in line with market estimates.

The bank reported a gross accretion of Rs 17,000 crore in stressed assets during the quarter, compared to Rs 19,100 crore in the first quarter. Of this, fresh slippages were Rs 8,370 crore and restructured assets accounted for Rs 8,590 crore. After factoring in upgrades, recoveries and write-offs, the bank’s net slippages stand at Rs 3,300 crore.

During its first quarter results, the bank had forecast a pipeline of Rs 10,000 crore in restructured assets for the coming quarters. With the second quarter seeing assets worth Rs 8,590 crore getting recast, the bank will need to clarify the reason behind this run-up in restructuring. Vaibhav Agrawal of Angel Broking says: “We await clarity from the management, whether the restructuring pipeline had itself gone up post their guidance.”

During the quarter, the share of mid-corporates as a percentage of gross non-performing loans has risen to 36.5 per cent from 33.4 per cent in the June quarter. The bank’s performance will be driven by changes in the macro-economic environment.

On the positive side, the bank reported a net interest income Rs 12,250 crore, better than the Street’s expectation. This was largely driven by loan growth of 19 per cent and an uptick in domestic net interest margins. However, analysts believe this is not sustainable, as loan growth for the full financial year is expected to be close to 17 per cent.