Subsidiaries drag SBI's Q4 profit

Standalone numbers were good on most fronts

State Bank of India (SBI)’s results for the March 2017 quarter (Q4) provide some hint at the pain awaiting the bank as it consolidates its associate banks with itself, with effect from April 1, 2017.

While the standalone operating performance was slightly better-than-expected on income, asset quality and profitability parameters, a key disappointment lies in the consolidated numbers. SBI’s consolidated net profit nosedived to Rs 241 crore in FY17 from Rs 12,225 crore in FY16. This was much lower than Bloomberg consensus estimate of Rs 6,887 crore. Though the bank did not share consolidated results for the nine months ended FY17, SBI’s consolidated net profit stood at Rs 3,219 crore. Analysts estimate the bank posted a net loss in Q4.

Suresh Ganapathy, banking analyst at Macquarie Capital, says, “SBI has made a consolidated net loss of Rs 3,000 crore in Q4 thanks to a loss of Rs 6,000 crore of the subsidiaries. We believe SBI’s consolidated watch list (loans that could turn bad) will increase substantially because of the associate banks. We have a Sell rating on the stock, we believe its return on equity ratio will remain compressed at 5-6 per cent level for the next couple of years.” SBI’s consolidated watch list (after the merger) now stands at Rs 32,427 crore, against the standalone Rs 13,310 crore in Q4, according to the results presentation.

While profitability will witness some pressure after the merger, there is a silver lining. The bank seems to have cleaned up a good part of the asset quality arising from the merger of its associate banks. So, from Q1, the pace of bad loan increase and losses may slow down on a consolidated basis. Analysts are also enthused by the continued market share gains made by SBI in deposits and assets in Q4, and expect a healthy trend. 

At the standalone level, performance was driven by strong growth in core income streams such as net interest income (up 17.3 per cent year-on-year) and fee-based income (up five per cent year-on-year), even as non-interest income, which typically includes treasury income, forex income, etc, fell in the quarter. The bank seems to have recovered from note ban blues, as its domestic loan growth improved to 8 per cent from 4.2 per cent in Q3. The strong surge of 123 per cent year-on-year in standalone net profit, though, is a function of the low base in the year-ago profit, wherein earnings were hit (down 66 per cent) by stepped up provisioning towards RBI’s asset quality review (AQR). The bank’s fresh slippages stood at Rs 9,755 crore in Q4, a sequential decline of 4.2 per cent. Its high provision coverage of 66 per cent (highest in five quarters) and higher-than-expected growth of 13 per cent in operating profit in Q4 lend comfort.

The SBI scrip inched up nearly 2 per cent on Friday, against a flat Sensex, and scaled to its two-year high of Rs 315. Even after this rally, the stock trades at 1.2 times FY18 estimated book value on a consolidated basis, which is reasonable and closer to its historical average valuations of 1.3 times. Thus, most of the pain related to the merger appears to be captured. Given its strong capital positioning and large size, SBI is well poised to benefit the most, among public sector banks, from any improvement in economy, credit off-take and overall asset quality. Low base of this financial year — coupled with rising government spending in sectors such as mining, roads, railways, etc — could also push SBI’s loan growth higher in FY18. Listing of its life insurance business and sale of non-core assets will rub off favourably on the stock.