Even though it swung back into black, State Bank of India (SBI) disappointed market watchers on the asset quality front. The June quarter was marked by elevated slippages even as core operating metrics remained steady. The higher-than-anticipated slippages at over Rs 17,000 crore, were primarily led by a spike in seasonally weak agricultural bad loans and SMEs. The good news though was that corporate slippages were limited and were driven by one large account where the bank had already provided for 100 per cent cover.
During the last quarter, the bank was also witness to a slower than expected resolution of NCLT cases, leading to a buildup in anticipated stress. Further, deteriorating macros are likely to postpone Return on Assets (RoA) improvement as credit costs rise, according to brokerages.
The bank’s exposure to stressed accounts such as DHFL, NBFCs, HFIs and power sector remains worrisome. While DHFL’s exposure at Rs 10,000 crore is standard as of now, exercising prudence, the bank has set aside Rs 1,100 crore. Similarly, its exposure to ailing BSNL is in special mention account 1 currently, while the Rs 2 lakh crore exposure to power sector (though 87 per cent is standard as of now) could give the state-run bank fresh trouble.
Going forward, analysts expect risk arising out of a few large accounts from within the bank’s watchlist that has bad loans worth Rs 37,000 crore. Recoveries from assets under NCLT (coverage of over 80 per cent), and a few assets (ICA already signed towards over 50 per cent of watchlist) should lift asset quality and core performance was steady with domestic loans growing over 12 per cent along with steady net interest margins (NIM). A general economic slowdown could adversely impact performance, however, as SBI is a proxy to the economy.
However, higher provisioning buffer, sagging competition and relatively better positioning to exploit emerging opportunities will restrict downside risk. Furthermore, value embedded in non-banking subsidiaries is stabilising and scalable, according to brokerage Edelweiss Securities.
Meanwhile, the bank saw an unimpressive deposit growth at Rs 29.5 lakh crore registering a little over 7 per cent growth, lower than its private peers. CASA deposits comprising nearly 44 per cent of total deposits too grew over 7 per cent over last year, but remained flat on a sequential quarter-on-quarter basis.
“Deposit growth has averaged 7 per cent for the past five quarters.In spite of its large base and systemic drop in deposit accretion, we believe SBI can demonstrate faster deposit growth, especially term deposits. While the domestic CD ratio at over 67 per cent is comfortable and much lower than private peers, sluggish deposit growth confounds us,” noted HDFC Securities.
However, the bank’s net interest margin was stable despite higher interest reversals. While domestic NIMs were sequentially flat at 3 per cent, foreign NIMs continued to decline. Brokerages expect NIMs to improve to 3.05 per cent by FY21E, led by the rising share of higher-yielding loans and better pricing power.
HDFC reiterated that the bank’s current capital may not be sufficient notwithstanding the conservative growth estimates. SBI has 12.9 per cent CRAR, 10.7 per cent tier 1 and 9.61 per cent CET 1. “A fundraise is likely in the near future and it shall be book accretive,” it added.