State Bank of India: On a slippery slope

While core business is on a strong wicket, slippage in asset quality and high valuation will cap the upside

State Bank of India reported a 22.5 per cent drop in consolidated net profit for the September quarter to Rs 2,363.95 crore on the back of loan-loss provisioning of Rs 2,162 crore. Robust net interest margin and strong traction in the core fee income were key positives, but deterioration in asset quality took a toll on the financials.

However, results are not comparable with the year-ago period due to the merger of State Bank of Indore.

Net interest income rose 45 per cent year-on-year (y-o-y) to Rs 8,115 crore due to a four per cent decline in interest expenses. The current and savings account ratio jumped 700 basis points despite subdued deposit growth of 11 per cent and increase in deposit rates. In addition to lower interest costs, a 50-basis-point rise in the prime lending rate in August buoyed the net interest margin by 90 basis points year-on-year to 3.4 per cent – the highest in five years.

Despite higher top-line growth, operating profit grew just 31.5 per cent to Rs 6,357 crore, as other income (including treasury gains and forex gains) rose 13.6 per cent to Rs 4,005 crore. Net profit was less due to provisioning for loans, which almost doubled due to higher gross non-performing loans and raising of the loan-loss provisioning ratio to meet the Reserve Bank of India’s 70 per cent norm by September 2011.

While analysts are bullish on SBI’s core business due to a busy business season ahead in the second half of the current financial year, they expect higher loan-loss provisioning to continue in 2010-11, leading to subdued profitability.

The stock ended 4.4 per cent lower at Rs 3,271.9 on Tuesday, reflecting investor concerns about asset quality. But, even at these levels and 2.3 times 2011-12 estimated book value, it is not cheap and has limited upside potential, reckon analysts.