SBI: Restructuring blues

The quality of the bank’s loan book, which has perhaps grown far too fast, is a cause for concern.

State Bank of India’s restructuring numbers have taken the Street by surprise. When the bank announced its annual results the number talked about was a reasonable Rs 8,000 crore. Now it appears that standard loans restructured amount to nearly Rs 13, 000 crore and taken together with pending applications is closer to Rs 21,600 crore or about 4 per cent of the loan book.

This number read with the gross non-performing assets(npas) of 2.8 per cent and a provision coverage of 40 per cent, perhaps the lowest among peers, is cause for concern and is bound to reflect in the higher cost of credit in the current year and possibly next year too.

Although by restructuring the loans, the bank will provide less in the next couple of years, the true quality of the assets will be seen after that. Also, what’s worrying is that a fair portion of the restructuring is believed to be on behalf of the SME sector. The bank has lent aggressively to this sector over the past three years and it now accounts for 17 per cent of the loan book.Last year loans to SMEs were up 26 per cent while the total loan book grew 30 per cent. CLSA points out that SBI may look at raising capital in the next 12-18 months even though the reported capital adequacy ratio is a strong 14 per cent.

Going forward, SBI’s strong liability franchise-- cheaper current and savings (CASA) accounts are growing with a share of 42 per cent---will help. And with interest rates easing, the marginal cost of borrowings should come down further.

SBI should not have a problem finding takers for its loans, now that the economy seems to be looking up. However, since the bank has been lending at lower rates, ahead of a cut in borrowing costs, the net interest margin (nim) will be under pressure.

In fact, the nim came off fairly sharply during the March 2009 quarter dropping 50 basis points sequentially to 2.3 per cent. Therefore, although the loan book should see fairly good growth this year, earnings are expected to grow by less than 10 per cent.