SBI posts Rs 49 bn loss in Q1: One-time provision hit disappoints investors

Net interest income up 24% in Q1 but twofold rise in provisioning led to net loss of Rs49 billion

The Street was clearly disappointed with State Bank of India (SBI) reporting a net loss of Rs48.8 billion for the June 2018 quarter (Q1), its third quarterly loss in a row.
 
Instead, analysts were expecting a Rs2-3 billion net profit (according to Bloomberg consensus).
 
However, a deeper look indicates the bank is moving in the right direction amid possibilities of some choppiness ahead.
 
SBI’s decision to not avail the Reserve Bank of India’s (RBI’s) dispensation allowing banks to spread their mark-to-market (MTM) losses on the investment portfolio for Q1 equally in four quarters is the reason for the loss.
 
The bank took a one-time provision hit of about Rs59 billion, leading to an over two-fold jump in provisioning.
 
Banks are required to provide for any erosion in the market value of their investment in government bonds (g-sec) under Available For Sales (AFS). G-sec prices are inversely related to yields, which drifted up by 50 basis points (bps) to 7.9 per cent in Q1.
 
“Since SBI took 100 per cent MTM provisioning in Q1, it lowered its future burden. Good top line performance, sequential fall in non-performing assets (NPAs) (gross NPAs down 4.7 per cent) and fresh slippages being in line with our estimations (Rs143.5 billion reported versus Rs150-180 billion expected) along with a provision coverage ratio of above 69 per cent show that the balance sheet has strengthened and SBI’s performance will improve,” said Asutosh Kumar Mishra, analyst at Reliance Securities.

 

Operationally, SBI clocked 23.8 per cent year-on-year (y-o-y) growth in net interest income at Rs217.98 billion and its net interest margin expanded 44 basis points y-o-y to 2.8 per cent in Q1. A 432 bps y-o-y rise in the cost-to-income ratio to 58 per cent, due to rise in employee expenses, also impacted operating profit, which was almost flat at Rs119.7 billion. With such provisions expected in the remaining quarters, expect some pain ahead on this count.
 
The management, however cautioned that Q2 could also see a net loss, depending on the resolution of power sector accounts. SBI will have to make an additional 10 per cent provision for power sector exposure, according to the resolution plan, Mishra added.

From the second half of FY19, SBI will surely return to profit, its Chairman Rajnish Kumar said. Overall, though one more quarter could be painful, analysts remain positive on SBI.