SBI: Not so interesting

If SBI cuts rates further in a bid to push loan growth, its net interest margin may come under further pressure.

The State Bank of India (SBI) chief says the bank’s net interest margin (NIM) may have fallen to 3 per cent in the March 2009 quarter, from the 3.15 per cent level at the end of December 2008. That may not be a sharp drop but it’s a pity the bank hasn’t been able to manage the volatility in interest rates over the last six months.

Given that it was getting money by the bagful —almost Rs 1,000 crore a day — it needed to drop deposit rates far more quickly than it has. Even in the December 2008 quarter, the bank’s loan deposit ratio had slipped to around 74 per cent from 80 per cent at the end of the previous quarter.

Since then, banks haven’t lent too much and the rate of growth of credit is down to about 19-20 per cent currently. SBI’s loan book too is unlikely to have seen too much growth, the chairman himself said recently that the response to the lower interest rates for mortgages and auto loans hadn’t exactly been overwhelming.

So it’s hard to understand why the bank is mulling another cut in interest rates when it’s loans are already priced so competitively. Of course, loan volumes may pick up but despite the lower cost of funds, the NIM could continue to be under pressure.

The SBI chief says the bank should be able to turn in a NIM of 3 per cent this year, though analysts believe it could drop to 2.7-per-cent levels. Also, in its bid to grow market share, SBI has lent aggressively in the three years to 2008-09, especially to the SME sector.

With a huge part of its portfolio relatively unseasoned, the chances of non-performing loans (NPLs) piling up are high. Should that happen, the bank will need to make more provisions.

As a result of this, and also because the growth in net interest income expected to taper off to less than 20 per cent and the growth in fees to 11 per cent, SBI’s net profit may well be under huge pressure in 2009-10. It’s not surprising that the stock has underperformed the market since the start of the year.