SBI: Operating metrics continue to deteriorate

Slowing loan growth puts pressure on margins, net profit up on lower provisioning

The second quarter report card of the country’s largest lender does not show any sign of a reversal in the fortunes of the banking sector. The bank has disappointed the Street on most counts. Slowing loan growth is beginning to put pressure on the bank now. In the first half of the fiscal, the bank has garnered deposits of Rs 82,000 crore while it has lent Rs 43,000 crore. Analysts say the surplus liquidity is putting pressure on the books and they expect the bank to cut rates further to grow the loan portfolio. However, loan growth is not expected to dramatically pick up, which means margins will continue to remain under pressure. Sequentially, net interest income fell 1.3 per cent to Rs 10,980 crore, net interest margin declined 12 basis points to 3.45 per cent and net profit was down 2.5 per cent to Rs 3,650 crore.

Though the bank clocked growth on all counts on a year-on-year basis, the sequential contraction shows that the slowdown is impacting the bank’s core business in the current fiscal. For starters, loans grew one per cent sequentially, whereas deposits grew three per cent. Also, since the bank has withdrawn certain charges, the non-interest income too, declined sequentially. Emkay Global says earnings have been dragged by contraction in net interest margins and lower interest income. The pressure on margins is expected to continue as the bank has increased its focus on the retail segment and cut rates across all categories of retail. Analysts say that the bank is unlikely to be able to grow the retail portfolio to desirable levels given the competition in the segment.

Despite the operational pressures, the bank has managed to meet the market’s estimates on net profit through lower provisions. The bank’s provisioning coverage ratio is down to 62.78 per cent from 64.29 per cent in Q1 and 63.50 per cent a year ago. However, incremental provisioning is up, which is a positive sign that the bank is willing to recognise stressed assets upfront.

The bank’s asset quality continues to be a challenge, as accretion of non-performing assets (NPA) in the quarter continued unabated. Analysts say SBI disappointed on the NPA front as well. Gross NPAs were up 4.3 per cent sequentially. Fresh slippages of Rs 8,460 crore were added to the Rs 10,840 crore slippages seen in the first quarter. The bank has restructured loans of Rs 4,700 crore in the quarter. However, analysts do expect recovery and upgradation of a few accounts. This would be a positive in the coming quarters. Motilal Oswal Securities expects the stock to underperform in the short-term on the back of deteriorating asset quality and lower operating performance.