SBI's asset quality hasn't hit a bottom

Higher provisioning and operational costs eat into profitability

State Bank of India (SBI) is the latest to join the list of companies that have disappointed the Street. The disappointment largely stems from the fact that the market perceived the worst was over in terms of asset quality, but the fourth quarter of India's largest bank suggests that it isn't over and that the first quarter could also be weak. Higher provisioning and operational expenses have dragged Q4 net profit down 18 per cent.

More than the fall in net profit, what affected sentiment is the stickiness of stressed assets. In the fourth quarter, the bank's stressed assets are at Rs 14,730 crore, of which fresh slippages are Rs 5,870 crore and restructured loans Rs 8,870 crore. Emkay Global believes that though stressed asset addition continues to remain high, gross non-performing assets (NPAs) declined four per cent sequentially on upgrades (Rs 4,580 crore) and write-offs (Rs 2,420 crore). SBI's net NPAs also declined on higher provisioning at Rs 3,970 crore.

The bank's provisioning coverage ratio, too, improved to 66.6 per cent. Analysts believe the bump up in restructured assets is due to the restructuring of Rs 1,500 crore loans to Suzlon and Rs 3,000 crore to the Tamil Nadu Electricity Board. In addition to rising bad debt, the bank's net interest income (NII) also declined 5.3 per cent year-on-year and one per cent sequentially, even though advances grew 20 per cent. For the full year, NII grew a mere 2.4 per cent. So, even as the balance sheet has grown, it's not profitable growth.

This is what has come in as the negative surprise, as the market was beginning to believe the worst could be over for Indian banks. With the return of risk-on trade in April, public sector banks found takers, as stock prices were relatively attractive and rate cuts were imminent. But going by SBI's numbers, it appears the worst is not over. Typically, the fourth quarter is good for banks, but if stressed assets are not showing a trough then the first quarter could be worse. Sonam Udasi, head of research at IDBI Capital, believes since credit growth is weaker in the first half of the financial year, gross NPA ratio would remain sticky at higher levels, as balance sheet would not grow much. This would impact sentiment and valuation, he adds.

While the growth in advances has helped SBI depress its gross non-performing assets ratio as a percentage of overall assets, analysts are also questioning a 20 per cent growth in assets in the current economic climate, when investments have come to a complete standstill.