SBI: Beyond the results

The State Bank of India stock has been beaten down by nearly Rs 300 during the past few days, following the announcement of its fourth quarter results. The 99 per cent drop in profits, the increase in non-performing assets, higher provisioning and the fall in net interest margins have disappointed the market. Although the scale of drop may have been a bit steep, it must be recognised as a one-off occurrence, driven by the new management's desire to sweep the books clean at the start of its tenure.  This phenomenon is not new — either to SBI or to other public sector banks. The ‘new chairman syndrome' has often resulted in skeletons tumbling out of cupboards.  Private banks have been spared this agony because their honchos tend to have longer tenures, they are more accountable and are truly board-governed.

Although the SBI results are disappointing, it would seem the market's general pessimism is a bit overdone.   For, there can be little doubt that the clean-up of books is welcome — even if it tends to show up predecessors in less than favourable light.  Certainly, investors, institutions and other stakeholders, such as the regulator and the government, should have no cause for complaint if the process is transparent and appropriate disclosures are made.  If the bank is willing to absorb its losses and shortfalls (unfunded pension/gratuity) at one go, that ought to be commended as a prudent step. In fact, SBI's decision to make up the shortfall in the pension account by transferring Rs 7,927 crore from its reserves is a measure that should be emulated by other banks too.  This will leave banks free to worry only about each year's pension contribution from here on and no heavy provisioning cover will weigh down profits for the next few years.

Banks will need every bit of this cushion, given that the next two years may be difficult. Economic growth is expected to slow down as high inflation forces monetary tightening. This will mean a slowdown in loan growth, a possible rise in non-performing loans and higher provisioning for the whole banking sector. Even when growth was high, SBI's non-performing assets doubled in the last three years. Now it must brace up to pay the price for the excesses of a previous period. That's where counter-cyclical buffers come into play — and that's why the market must welcome a slightly tougher approach to provisioning — (whether for non-performing assets or for other liabilities), by the bank. It is also the reason why capital-raising plans will be of crucial importance. The bank is due to raise about Rs 20,000 crore and the management has expressed its confidence in securing the necessary contribution from the government (which holds 59.40 per cent of its equity), sooner than later.

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