SBI: Q4 weak but smaller 'watch-list' surprises Street

Lower proportion of loans likely to turn into bad assets and better capitalisation are key positives

Like its peers, State Bank of India (SBI), too, lagged the Street’s already muted expectations and witnessed a sharp surge in provisions towards bad and doubtful debts in the March quarter (Q4). This metric increased 2.4 times to Rs 12,139 crore over the year-ago quarter, leading to a sharp fall in net profit. Stand-alone net profit fell 66.2 per cent year-on-year to Rs 1,264 crore in Q4 and was much below the Bloomberg consensus estimate of Rs 3,742 crore. So, what explains Friday’s sharp rise in the  scrip?

SBI’s relatively smaller watch-list of loans that could turn bad, compared to its closest peers, is the key reason. Notably, SBI has kept loans worth Rs 31,000 crore or two per cent of its loan book under the watch-list. This is much lower than its peers’  2.6 per cent to 3.9 per cent of loan book. Given SBI's larger loan book, this smaller number has taken the Street by surprise.

Interestingly, SBI has outpaced its public sector peers on multiple fronts. One, it continued to report a net profit in the quarter, compared with huge losses at Punjab National Bank, Bank of Baroda and Bank of India. Two, SBI's operating profit grew at the fastest pace in Q4. While these peers witnessed a -4.5 per cent to 2.6 per cent year-on-year growth in their operating profits, SBI's Q4 operating profit grew 11.2 per cent - notwithstanding its larger size. SBI also remains better capitalised. The bank is yet to add revaluation reserves to its Tier-1 capital, which can add about 85 basis points to SBI's capital adequacy. SBI enjoys strong brand equity to raise funds from capital markets. In fact, it is the only public sector bank that has managed to increase its market share amid intensifying competition from private banks. These positives were well captured in the SBI scrip, which gained 6.4 per cent to close at Rs 196 a share on Friday.

Meanwhile, of the total slippages worth Rs 30,313 crore in Q4, asset quality review (AQR) related slippages stood at about Rs 9,000 crore. The bank’s gross non-performing assets ratio inched up 140 basis points sequentially to 6.5 per cent - much lower than the 10-13 per cent number reported by peers.

While the relatively better show vis-a-vis PSU peers is a positive, the key question is whether SBI can contain its bad loans to the guided watch-list. Although the bank has stepped up efforts to improve asset quality, a recovery in economic growth could be a real shot in the arm given SBI’s relatively superior positioning. Its management, too, remains positive and expects loan growth to inch up to 12-14 per cent in FY17 from 12.6 per cent in FY16 and credit costs to fall from two per cent in FY16 to 1.7-1.8 levels.