SBI's attractive asset quality needs to be viewed with a sharp lens

Proforma net NPA ratio at 2.08 per cent indicates a reversal in easing of asset quality trend

In the past four quarters, State Bank of India’s (SBI’s) stock has gained over four per cent reacting to results. On Wednesday, after its September quarter (Q2) results, the stock gained 1.12 per cent, slightly muted even as results beat estimates. With net interest income (NII) at Rs 28,181 crore (up 14 per cent year-on-year) and net profit of Rs 4,574 crore (up 52 per cent YoY), Q2 performance bettered expectations by about 2-3 per cent.

However, the numbers on asset quality, though very attractive, might not convince investors. Even as gross non-performing assets (NPA) ratio cooled to 5.28 per cent (191 basis points YoY improvement) and net NPA ratio to 1.59 per cent — a five-year high — investors may prefer to wait another quarter to judge the sustainability of these numbers. The reason lies in SBI’s pro forma NPA ratios, or the numbers that would have been if the Supreme Court hadn’t imposed a pause on NPA recognition. At 5.88 per cent and 2.08 per cent pro forma gross and net NPA ratios, respectively, suggest reversal in SBI’s improving asset quality trend.

Also, the bank expects Rs 13,000 crore of loans to be restructured — less than a per cent of its total book. With Rs 6,495 crore restructured in Q2, another Rs 6,000 crore is likely in Q3, which could keep provisioning cost elevated. Including slippages, SBI anticipates Rs 60,000 crore of book to be stressed (2.5 per cent slippage ratio) and Rs 20,000 crore is set to be recognised in H2FY21. However, slippages have been contained at Rs 6,393 crore so far. Without the SC’s order, Rs 14,388 crore worth of loans would have turned bad, as against Rs 2,756 crore reported in Q2. With these numbers not adding up, slippages could be higher than projected.

Another factor is the total Covid-related provisioning at Rs 7,091 crore — the lowest among banks. For now, the management is confident about the quantum, considering the extent of close monitoring of the book. Analysts at ICICI Securities, too, feel SBI’s asset quality guidance is reasonable. However, most of these projections draw strength from the bank’s guidance on collection efficiencies (97 per cent in Q2) and on loan growth of 8-9 per cent for FY21. Any reversal or softening in collection trends and slowdown in retail credit (13 per cent YoY growth against six per cent overall growth in Q2) could hurt these assumptions.

Trading at 0.85x FY21 estimated earnings, it is imperative that SBI doesn’t falter on asset quality for the stock to rerate.