Both one-off items and business-related expenses had a role in decimating State Bank of India's profits to Rs 20 crore (Rs 1,860 crore a year ago) in the quarter ended March 31, 2011.

On the business side, rising costs not offset by yields have led to a slippage in SBI's Net Interest Margins (NIMs) on a sequential basis, while significant asset quality slippages led to higher non-performing asset provisioning. SBI's stock fell by 7.8 per cent on Tuesday, the worst single-day fall since July 2008. However, one-off items such as a large dent to the reserves and surpluses resulting from pension liabilities for previous years and a jump in tax incidence also had a role in the stock price call. Concerns on this score may be overdone.

Employee pension liability

The additional pension and gratuity provisioning required to be provided by all the public sector banks has taken a particular toll on SBI, as the bank has chosen to take the entire Rs 7,900 crore hit relating to these provisions in 2010-11 itself. Other banks have chosen to spread out this charge over five years. As SBI chose to adjust this sum against its reserves balance, its net worth witnessed a dent of 1.4 per cent, despite the current year's profits accruing to reserves. The net worth would have been higher by more than 12 per cent had the Rs 7,900 crore not been provided.

Additionally, SBI also charged Rs 2,473 crore towards the current year's pension expenses to its profit and loss account, magnifying its profit drop. Going forward, the pension expense of around Rs 2,473 crore may continue to recur. The Rs 400-crore gratuity provision, however, will be provided in the remaining four years. However, SBI has taken a very conservative stance on its previous year pension obligations, compared with peers by front-ending its charges.

Higher NPA provisioning

The sharp increase in SBI's non-performing asset (NPA) provisioning to Rs 3,263 crore this quarter, from Rs 2,186 crore was the result of the bank trying to improve its provision coverage ratio, in line with RBI norms. Additionally, asset quality also slipped as is evident from the gross NPA ratio going up from 3.05 per cent in March 2010 to 3.31 per cent in the March 2011 quarter. To provide for additional slippages, coupled with improvement in provision coverage, led to higher loan-loss provisioning this quarter and for the year.

SBI was also hit by one time provisions (Rs 500 crore) recently mandated by RBI for teaser rate loans also taken this March quarter. To comply with 70 per cent provision coverage as of September 2010, SBI had to create a Rs 3,430 crore of counter cyclical buffer. Of this, it has set aside Rs 2,330 crore this year. Provisions for incremental NPAs would be on prudential norms given by the RBI in the recent monetary policy. Other banks did not see a similar rise in provisions.

For SBI, the rise in Gross NPA ratio was contributed by agriculture and retail advances, even as the rates were benign for good part of current fiscal. With rise in lending rates, SBI's book may be exposed to higher slippages going forward.

Taxes hurt

SBI's profits this quarter were also hurt by a 94-per cent jump in tax outgo to Rs 1,901 crore in the latest quarter. The uncertainty about tax treatment of pension liabilities increased the bank's tax outgo, even as profits were dented by the additional provisioning.

Net Interest Margins to improve

SBI witnessed pressure in its core lending operations too with its NIM falling from 3.61 per cent in December quarter to 3.32 per cent in March quarter thanks to rise in borrowing costs (by 5 bps sequentially) with fall in yield on advances by 2 bps. Additionally, the credit-deposit ratio has also fallen sequentially leading to overall pressure on NIMs. The bank continues to have a strong low-cost deposit ratio of 48 per cent. SBI has been lagging other banks in terms of lending rate hikes. However, in the current quarter, it has raised its lending rates by 1 percentage point which may aid NIMs.

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