Money & Banking

SBI Q1: Strong growth in net interest income, rise in Covid provisions lend comfort

Radhika Merwin BL Research Bureau | Updated on August 01, 2020 Published on July 31, 2020

... but weak credit growth a lingering concern

A notable ramp up in Covid provisions, fall in bad loans, strong growth in net interest income, a boost to earnings from one-off gain from sale of investments (part shares in SBI Life) and strong growth in deposits lent comfort to investors keenly awaiting State Bank of India’s June quarter results.


But it may be too soon to cheer the bank’s performance, given the persisting weakness in its loan growth, uncertainty over asset quality owing to moratorium on loans, lumpiness in SBI’s slippages over the past year (pre-Covid), and expected sharp downgrades in the coming quarters.

SBI reported a strong growth of 16 per cent y-o-y in core net interest income and improvement in net interest margin (about 30 bps sequentially) to 3.2 per cent in the June quarter. Despite the weak credit growth, the bank managed to put up a strong show on the operational front, thanks to the fall in cost of deposits (50 bps q-o-q). A sharp cut in deposit rates (including savings deposit) appears to have benefitted SBI to a great deal, given its large deposit base. A strong 16 per cent y-o-y growth in deposits has aided margins further. That aside, weak credit growth continues to remain a concern for the largest lender; the bank’s credit growth has been languishing mostly in single-digits for some time now (pre-Covid). The management has given an 8 per cent growth guidance for FY21, which could keep earnings under pressure.

Asset quality

On the asset quality front, SBI saw a notable reduction in bad loans in the June quarter (sequentially by about ₹20,000 crore). Slippages also fell sharply to ₹3,637 crore from ₹8,100 crore in the March quarter. But the true picture on asset quality will be visible only in the December quarterafter the moratorium on loans is lifted. For SBI, in particular, given the rise in bad loans (and divergence reported) in recent years, stress in corporate and SME book needs to be monitored going ahead.

SBI’s fairly modest Covid-related provisions made in the previous March quarter had raised some concerns. In the June quarter, the bank (bolstered by the one-off gain on sale of investments) has made an additional ₹1,836 crore provisions, taking the total Covid provisions to ₹3,000 crore, which is comparable with larger private banks such as HDFC Bank and Axis Bank. This lends comfort.

However, with trends around asset quality still evolving and weak credit offtake, earnings could remain volatile in the coming quarters. Healthy capital ratios and potential to unlock value in subsidiaries remain a big draw for SBI, offering some cushion to earnings.

Uncertainty persists

After a tumultuous December 2019 quarterwhen slippages spiked (to ₹16,525 crore) and the bank reported sharp bad-loan divergences (to the tune of ₹11,932 crore pertaining to FY19), SBI’s asset-quality pressure was expected to ease in the current fiscal. The outbreak of the pandemic has thrown such expectations out of kilter.

While slippages have fallen sharply in the March and June quarter, it has mainly been due to the moratorium granted on loans. From 23 per cent of term loans, loans under moratorium fell substantially to 9.5 per cent in the latest June quarter. This trend, though heartening, is in line with other large private sector peers. Given that it is still early days to gauge the impact of the ongoing pandemic on businesses and individuals, and with moratorium in place until August end, it may be difficult to draw too much comfort from the trend of fall in moratorium loans.

SMA accounts as on February 29where less than two EMIs have been paid stand at ₹13,000 crore for SBI, which will need a close watch. Above all, while the overall bad loan book has declined, it is still a large book that could keep provisions high. It will be critical to see how recoveries pan out in the coming quarters, particularly in the light of the one-year year suspension of fresh insolvency pleas.

However, for SBI, some trends in the past offer comfort. One is the sheer size of stress recognised in the bank over the past three years (about ₹1.7-lakh crore of slippages between FY18 and FY20). Two, SBI cleaned up a significant part of its agri book in FY20. Three, the SMA 1 and SMA 2 book have declined sharply to ₹1,750 crore in the June quarter from a peak of ₹18,313 crore in the September 2019 quarter.

On the core business front, SBI’s domestic loan growth has been weak. In the June quarter, domestic loans grew by a muted 5.8 per cent (marginally down sequentially). SBI’s loan growth has been steadily lagging large private peers in recent years (before Covid). What has aided the bank’s core performance in the June quarter has been the sharp cut in deposit rates. Going ahead, significant pick up in credit growth will be imperative to drive sustainable margin expansiononce the bank runs out of ammunition to cut deposit rates steeply.

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Published on July 31, 2020
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