COMMENT. SBI Q3 performance: Slippages stable, but risks to earnings persist

Despite weak loan growth and muted core performance, investors have been cheering the results of select public sector banks.

The fact that slippages into bad loans have moderated or remained stable, after the steep rise seen in the second half of last fiscal, appear to lend comfort. SBI — the country’s largest lender — reported slippages to the tune of ₹10,185 crore in the latest December quarter. This was a tad lower than that reported in the September quarter.

The gross non-performing assets (GNPA) hence grew by a marginal 2 per cent sequentially. After the steep ₹20,000-30,000 crore of quarterly additions to bad loans seen in the December and March quarters last fiscal, the lower quantum of slippages over the past three quarters has no doubt offered some respite.

But given the slow pace of resolution of stressed assets and weak credit offtake, banks with large stock pile of bad loans can still continue to face marked pressure on their earnings.

For SBI, the fact that its GNPA is 7.2 per cent of a sizeable loan book (about one-fifth of the total advances in the system) is worrisome. The bank currently has a little over ₹1 lakh crore of bad loans. After taking into account the bank’s restructured book, the stressed assets are around ₹1.4 lakh crore, more than the entire loan book of many mid-sized banks.

Even if the pace of slippages has slowed substantially, provisioning requirement could go up sharply if the stressed accounts are not resolved and bad loans continue to age. Also, while slippages are sharply down from last year, they are still above the levels seen before the AQR (asset quality review) activity.

Three to four quarters prior to the AQR, SBI’s quarterly slippages stood at ₹5,000-7,000 crore. The ₹10,000-odd crore that the bank has been reporting over the past two quarters is notably higher.

Aside from lingering issues on the asset quality front, SBI’s weak core performance is a concern. The bank’s net interest income grew by a modest 7.7 per cent in the December quarter over the same period last year.

Domestic loans grew by a muted 4.2 per cent year-on-year, lower than what some of the larger private sector banks delivered during the same period. HDFC Bank reported 17.5 per cent growth in domestic advances, while Axis Bank and ICICI Bank delivered 10-12 per cent growth.

While the growth in the December quarter has been impacted by demonetisation and unwinding of FCNR-linked loans, credit offtake is unlikely to improve substantially in the coming quarters. The management guided for a 6.5 per cent growth in loans for the whole of 2016-17 fiscal and 11 per cent for the next fiscal.

This can continue to depress earnings. The doubling of net profit in the December quarter over last year has mainly been due to sharp rise in non-interest income and a low base.

Non-interest income includes profit from sale of its 3.9 per cent stake in SBI Life, excluding which growth would have been around 30 per cent. This healthy growth has been mainly due to treasury gains, which may not be as substantial in the coming quarters, with bond yields spiking.

SBI has large exposure to corporates in the troubled iron and steel and infrastructure sectors. Similar to private lenders such as ICICI Bank and Axis Bank, SBI too had created a watch-list of loans worth about ₹34,776 crore as of March 2016.

Much (73 per cent) of the corporate slippages into NPAs in the corporate book has come from the watch-list in the last two quarters. This list has shrunk by about half in the first nine months of the fiscal.

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