SBI: The worst may be over

If the bank grows the loan book by 25 per cent this year, margins should improve.

The State Bank of India (SBI) stock was up 4 per cent on Thursday. Although the bank reported a drop in the net interest margin to 2.3 per cent year-on-year for the June 2009 quarter, margins were flat sequentially. The pressure on margins was due to strong liquidity in the system at a time when loan growth was weak.

As a result, the net interest income rose just over 4 per cent, a better performance compared with the March quarter, when it didn’t grow at all. However, there was a 7.2 per cent drop in the operating profit year-on-year. Besides, both gross non-performing loans (NPLs) and net NPLs have risen to 2.8 per cent and 1.55 per cent year-on-year, respectively. However, gross NPLs have stayed flat sequentially.

 

What is comforting is that the bank has increased the provisioning coverage to 45 per cent from 39 per cent at the end of March. Also, what seems to be giving investors confidence is the management’s belief that the loan book will grow 25 per cent in the current year with retail customers already borrowing more than they were in recent months.

Also, the cost of funds is coming down due to high-cost term deposits being re-priced, and with yields expected to go up sometime later in the year, there will be less pressure on margins, especially since loan growth is expected to pick up.

Although the quantum of restructured loans (including applications) is estimated at Rs 21,000 crore — approximately 4 per cent of the loan book — the management believes much of this will become standard assets over the next few months. During the quarter, the bank restructured loans worth around Rs 8,800 crore.