SBI Q2: Improvement in disbursements, strong deposit traction are positive signs

Significant improvement in retail loan disbursements, ramp-up in provisions, good traction in deposits, and strong capital ratios (about ₹20,000-crore capital was raised during the September quarter) are heartening trends from State Bank of India’s latest September quarter results. However, actual slippages (if not for the Supreme Court order on asset classification standstill) for the September quarter, persisting stress in the bank’s agriculture loan book, expected restructuring, slippages in the second half, and a sizeable SMA1 (payments overdue by 31-60 days) and SMA2 (overdue by 61-90 days) book suggest more pain ahead for the bank’s asset quality.

In the September quarter, SBI reported a strong 51.8 per cent year-on-year growth in net profit, thanks to steep fall in loan loss provisions (NPA provisions remained elevated through FY20). On the core performance front, loan growth improved significantly from the June quarter, led by growth across retail segments. While credit growth in retail returning back to pre-Covid levels is a positive, for significant recovery in earnings, overall loan growth will have to pick up. Remember, SBI’s loan growth has been lagging its private peers over the past one to two years. In the September quarter, SBI’s domestic loan book grew by 6.9 per cent, led by 14.5 per cent growth in retail loans. Including CPs and bonds, growth was about 8 per cent.

The bank’s net interest margin (NIMs) remained sound at 3.3 per cent, thanks to strong and steady traction in low cost CASA deposits, resulting in lower cost of funds. SBI’s strong liquidity (credit deposit ratio of 61 per cent) and capital ratios offer strong headroom for growth. Significant pick-up in the economic growth leading to overall recovery in SBI’s credit growth will be imperative to drive sustainable margin expansion.

SBI witnessed significant asset quality pain between FY17 and FY19. Even in FY20, slippages remained elevated (spiked to ₹16,525 crore in the December 2019 quarter).

The pandemic-led disruption has impacted all banks, including SBI. What has lent comfort in the first half of the fiscal has been the six-month moratorium and asset classification standstill that kept bad loans at bay. However, rise in delinquencies in the second half is a given for the banking sector and, for SBI, in particular, the following trends in the September quarter suggest lingering pressure on asset quality.

One, on a reported basis, SBI’s gross non-performing assets fell to ₹1.25-lakh crore in the September quarter from nearly ₹1.3-lakh crore in the June quarter. However, this was mainly due to the asset classification standstill (Supreme Court order states that accounts not declared NPAs until August 31should not be declared NPAs until further orders). If not for the Supreme Court order, the bank’s GNPAs would stand at ₹1.4-lakh crore as of September.

Two, the overall slippages (without considering SC order) in the first half stood at ₹20,781 crore. This is comparable to the ₹25,000 crore slippages seen in the first half last year, indicating no let-up in the bank’s persisting asset quality pressure. SBI particularly witnessed significant rise in slippages in its agri book in FY20 (amounting to ₹15,500 crore). The latest September quarter results suggest that the pain is likely to continue this fiscal, too, despite the clean-up. The first half of FY21 has seen about ₹9,500 crore of agri slippages (sans SC order on standstill benefit), which is sizeable.

Three, while SBI’s SMA 1 and SMA 2 book has fallen substantially from last year (owing to aggressive recognition of stress) to nearly ₹12,000 crore in the September quarter, the trend hereon will need a watch.

What however lends comfort is the additional provisioning made by the bank on slippages and restructuring during the September quarter. The bank has made ₹3,194-crore provisions on estimated slippages and ₹650 crore for restructuring requests received in October (total ₹6,400 crore, of which, ₹4,000 crore is corporate). The bank expects a further ₹20,000-crore slippages in second half and restructuring of about ₹13,000 crore by December. A significant rise in delinquencies or restructuring from expected levels can lead to rise in provisioning eating into earnings.

However, healthy capital ratios and potential to unlock value in subsidiariesprovide buffer to absorb losses in the second half of the fiscal.

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