SBI: Sharp improvement in asset quality still a few quarters away

Higher provisions took away some of the sheen lent by strong fee income growth

The State Bank of India (SBI) scrip was up 2.6 per cent on Thursday and seemed to cheer the bank's September quarter results. While the operational performance was healthy, it might be a bit early to celebrate.

First, net profit growth appears strong at 30.5 per cent year-on-year to Rs 3,100 crore but was partly a function of low base effect. In the September 2013 quarter, SBI’s net profit had fallen 35.1 per cent year-on-year due to higher provisions and employee costs.

Second, non-operational and volatile income streams such as miscellaneous income and forex grew at a robust rate in September 2014 quarter, and drove other income, which was up 39.4 per cent year-on-year to Rs 4,571 crore.

Third, while fresh slippages, which indicate the amount of new loans turning bad, reduced both sequentially and on a year-on-year basis, recovery of loans contracted significantly and was down 70 per cent sequentially and 32 per cent year-on-year. As a result, the bank added Rs 278 crore to its absolute gross NPAs thereby reversing the trend of declining gross NPAs witnessed in the preceding two quarters. Also, in the June quarter, about Rs 2,000 crore of the slippages were on account of Andhra Pradesh and Telangana farmers who saw incentives in holding back repayments (defaulted), as the state governments had announced loan waivers.

But, there are positives as well. SBI's bottomline continues to get support from resilient growth in fee-income (included in other income). In September quarter as well, fee-income grew by a healthy 19 per cent given management's focus to grow this metric.

The bank took the opportunity of the surge in other income and lower employee costs and hiked provisions for non-performing assets (NPAs), which was up 52.3 per cent year-on-year to Rs 4,028 crore. This helped in keeping the gross and net NPA ratios under check.

With the Indian economy growing at a snail's pace, it is not surprising to see SBI's loan growth moderating further. At 9.1 per cent on a year-on-year basis, it was lower than 13 per cent in June 2014 and SBI's lowest in the past 8-10 quarters. International advances also grew at a steady pace of 20 per cent in the quarter.

Consequently, net interest income growth came in muted at 8.4 per cent, lowest since June 2013 quarter, to Rs 13,275 crore. Lower net interest income and high provisions curtailed SBI’s net profit in the quarter.