Money & Banking

SBI Q4: Slippages fall, but weak loan growth and higher provisions impact earnings

Radhika Merwin BL Research Bureau | Updated on June 05, 2020 Published on June 05, 2020

With most PSBs, weighed down by huge bad loans, weak capital and muted earnings or bogged down by merger exercise, the latest March quarter results of State Bank of India – among the better placed on the capital front and other key metrics – was keenly awaited.

Optically, SBI’s results offer a bitter-sweet medley of comforting and worrying trends, notable fall in slippages and higher provision cover, but lower loan growth and fall in net interest margin. But for the sale of some portion of its investment in SBI Cards & Payments to the tune of ₹2,731 crore that bumped up earnings, net profit for the bank would have been nearly flat (compared to last year) in the March quarter. Weak core performance, coupled with notable rise in provisions (sequentially), impacted the overall earnings of the bank.

After the sharp rise in slippages to ₹16,525 crore in the December quarter (which included a large HFC account of about ₹7,000 crore), slippages halved to ₹8,105 crore in the March quarter, which does lend respite. But given that the trend in the bank’s slippages have been lumpy over the past year, sustainability of this trend will be critical. As such, with the outbreak of the Covid-19, there is now a lot of uncertainty over asset quality in the coming quarters (particularly after the moratorium on loans is lifted in September). Hence, despite the bank having recognised huge stress in the corporate as well as agri book over the past year, risk of rise in delinquencies in the retail book remains.

While the bank’s provision cover going up over the past year is a positive, Covid related provisions to the tune of ₹938 crore made by the bank is much lower than that of private peers such as HDFC Bank, Axis and ICICI Bank. The management of SBI, however, stated that it will continuously monitor the developments and make provisions proactively as and when required.

With several moving parts around asset quality, provisions (ageing of large bad loan book), moratorium, recoveries (hit due to one-year suspension of fresh insolvency pleas) and credit offtake, earnings could remain volatile over the coming quarters. Healthy capital ratios and potential to unlock value in subsidiaries, however, provide buffer to absorb losses in the coming year.

A mixed bag

After slippages shot up to ₹16,212 crore in the June 2019 quarter and then fell to ₹8,805 crore in the September quarter, the bank’s asset quality once again came under focus after slippages shot up to ₹16,525 crore in the December quarter. The RBI’s risk assessment report also revealed divergence to the tune of ₹11,932 crore with respect to NPAs reported in FY19 (accounted for in the December quarter).

After the humongous amount of stress recognised by the bank over the past three years (₹94,781 crore slippages in FY18, ₹32,738 crore in FY19 and ₹49,647 crore in FY20), the bank could have seen asset quality ease notably in the coming year under a normal scenario. But given that the pandemic has thrown up huge uncertainties on growth in the economy and led to job and income losses, deterioration in asset quality is a given for all banks, including SBI.

There are few factors that mitigate the risk and others that may add pressure on SBI’s asset quality.

SBI has seen significant rise in agri bad loans over the past two years (NPAs in agri loans at 15.8 per cent as of March 2020). The management stated that it has cleaned a significant part of the book in FY20. This could offer some respite. On the corporate side, the SMA 1 and SMA 2 book has declined sharply to ₹7,266 crore in the March quarter from a peak of ₹18,313 crore in the September quarter. Aggressive recognition of stress in the past few quarters, and the fact that only a small portion of customers (insignificant in value) have opted for moratorium within corporates, lend comfort.

That said, it is still early days to gauge the full impact of the pandemic on corporates, and with large downgrades expected in the coming quarters, stress book for SBI may increase again. As is the case with all other banks, there are concerns over rise in defaults in retail loans. But SBI states that this risk is mitigated for the bank due to higher proportion of govt/ quasi govt sector customers. Twenty three per cent of term loans are under moratorium for the bank currently.

Loans that are under asset classification standstill pertain to agri, SME and personal loan segments – ₹6,250 crore against which SBI has made ₹938-crore provisions. While this is above the mandated RBI requirement, it is much lower than the Covid-related provisions made by private banks such as HDFC Bank (₹1,550 crore), Axis Bank (₹3,000 crore) and ICICI Bank (₹2725 crore) in the March quarter.

Above all, while the overall bad loan book has declined to ₹1.49-lakh crore (from ₹1.72-lakh crore in FY19), it is still a large book that could keep provisions high (65 per cent of provisions made due to ageing requirements).

Muted credit growth

On the core business front, SBI’s domestic loan growth has been steadily falling over the past four quarters, which is a concern as Covid-led slowdown can impact growth further in the coming quarters. In the March quarter, domestic loans grew by a muted 3.7 per cent (down from 5 per cent in the December quarter). With lending rates falling, the bank has been cutting deposit rates (even savings account rate) to cushion the fall in net interest margins. Weak credit growth will continue to add pressure on margins.

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Published on June 05, 2020
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