State Bank of India during the June quarter couldn’t replicate its March quarter performance which was driven by recovery in non-performing assets (NPA) and improved margins. As a consequence, SBI’s stock lost 4 per cent despite witnessing a 137 per cent growth in net profit.

The year-on-year profit growth in the June quarter was driven by mark-to-market gains, lower operating expenses and strong growth in advances. However, the declines in net interest margin both from a year ago and sequentially and huge rise in gross NPAs played the spoil sport.

The rise in bad loans during this quarter was disproportionately high. The net slippages for SBI was around Rs 7,500 crore, as against Rs 9,727 crore for all other listed banks. The gross NPA ratio of SBI was 4.99 per cent as compared to 2.6 per cent for all other banks.

The SME (small and medium enterprise) and mid-corporate advances continued to witness additional slippages. These two segments accounted for two-thirds of fresh slippages during the June quarter. Agriculture advances also saw higher slippages but the management expects improved prospects with the pick-up in monsoon.

Around 9.2 per cent of mid-corporate advances, 9.8 per cent of agriculture advances and 7.7 per cent of SME advances are now non-performing as of June 2012.

Much of the slippages were in the infrastructure, engineering, textiles, trading, and iron and steel sectors. Interestingly, most of these troubled sectors also figure in the top in the SBI’s restructured loan portfolio. The bank resorted to loan restructuring only to the extent of Rs 564 core, and it continues to have amongst the lowest restructuring advances proportion in the public sector bank space.

Margins decline

NPA pressure has also led to reversal of income recognised, leading to pressure on yield on advances and as a consequence on net interest margin. Slight decline in low-cost deposit proportion and the rise in cost of funds (term deposits) have also led to margin declines. The compression would have been higher if not for higher core capital, CRR cut and high credit-deposit ratio.

The credit-deposit ratio improved by 1.5 percentage points to 76.4 per cent from a year ago. Going forward, the management is guiding a margin of 3.75 per cent which is achievable in spite of a cut in lending rates in recent times. For one, credit may pick up which could give higher yields for the bank. The SLR cut may also help as it is increasingly looking towards commercial papers for investments.

The bank also plans to increase its focus on retail loans. Given its aggressive pricing and lowest cost of funds, it may improve its market share in this category.

Increased direct lending to agriculture is another focus area. Even here, SBI is looking to lend against gold which would reduce the credit risk. Improved agriculture credit would also prevent it from having to invest in the rural infrastructure development fund.

(This article was published on August 10, 2012)
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