If the September quarter saw SBI posting flat growth in profits, the December 2010 results bring something to cheer. Despite a two hundred percent increase in non-performing asset (NPA) provisioning to meet provision coverage norms (net NPA ratio now at 1.61), the banking major posted a 14 per cent year on year growth in net profits in the third quarter. A 43 per cent growth in Net Interest Income, a 2.5 per cent fall in interest expenses, reduction in operating costs and improvement in operating income have worked in the bank’s favour.

Consequently, the cost to income ratio has fallen to a healthy 45.7 from 52 in the December 2009 quarter. This reduction has also been aided by an improvement in the CASA ratio (from 42 per cent a year ago to 48 per cent) and a fall in the cost of deposits ( from 5.92 to 5.50 per cent). In fact the high CASA growth as well as a three per cent shedding in bulk deposits has helped the fall in deposit costs in a rising interest rate scenario. The benefit of this shows up in the net interest margins (NIMs) which have improved to 3.61 per cent from 2.82 per cent in the same quarter last year. The yield on advances though, has come a tad lower at 9.58 per cent. But the strong show on the NIM front is also a derivate of a credit growth of 22 per cent and a deposit growth of only 14 per cent. The credit-deposit ratio, hence, marched on further to 77.2 per cent, which, however may not be sustainable.

The deposit rate hikes in recent times will hit NIMs with a lag. SBI hopes to mitigate this in Q4 because of the increase in lending rates effected earlier in the month. Besides, SBI is bringing out its rights issue and a retail bond issue in the near-term. That would bolster the capital adequacy ratio, currently at 13.16 per cent and provide the impetus to loan growth. It may also reduce NIM contraction to an extent.

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