News Analysis

More pain ahead for country’s biggest bank

Radhika Merwin BL Research Bureau | Updated on January 09, 2018


SBI faces a tough year amidst sluggish loan growth, weak margins & dodgy asset quality

For SBI, India’s largest bank that got bigger this April after merging its five associate banks, bad loans have grown in size too.

While the consolidated picture on asset quality post-merger was expected to be a cause for concern, higher-than-expected slippages, has rankled investors.

With gross non-performing assets at nearly a tenth of SBI’s (merged entity) loans, the bank faces a tough year ahead amidst sluggish loan growth, weak margins and dodgy asset quality.

Stress factor

On standalone basis, SBI’s GNPAs stood at 6.9 per cent of loans as of March 2017 and that of its associates at 20 per cent.

The tally of GNPAs for the merged entity that stood at 9.1 per cent in March has gone up to 9.97 per cent of loans in June.

Given that SBI accounts for about one-fourth of the total advances in the system, the size of its bad loans is worrisome for the sector as a whole. To put things in perspective, SBI’s ₹1.8-lakh crore of bad loans as of June 2017, is now higher than the loan book of many banks. HDFC Bank, that ranks second, has a loan book which is just 30 per cent of SBI’s. The gap gets wider down the pecking order.

Aside from SBI’s huge stockpile of bad loans, slippages remain a cause for worry as well. Slippages for the merged entity for the June quarter stood at ₹26,249 crore, higher than the ₹25,000-odd crore in the previous quarter (₹9,755 crore from SBI and the remaining from its associate banks).

The pace of slippages from SBI’s associate banks is likely to remain elevated and will continue to hurt the performance of the bank in the coming quarters.

Even on standalone basis, SBI’s slippages have been high at about ₹10,000 crore until the March 2017 quarter; three to four quarters prior to the asset quality review (AQR), SBI’s quarterly slippages stood at ₹5,000-7,000 crore.

Even if the pace of slippages moderate, provisioning requirement for these bad loans are unlikely to come off significantly. This is because ageing of bad loans (a large book at that) will lead to incrementally higher provisions in the coming quarters.

SBI’s exposure to the 12 accounts that are under the NCLT for resolution is about ₹50,247 crore. The management has stated that it will have to make an additional provisioning of ₹3,500 crore for FY18 on such accounts than what was factored in earlier.

Weak core performance

SBI’s weak core performance also does not lend comfort. The bank’s net interest income has declined by 3.5 per cent year-on-year (y-o-y) in the June quarter.

Loan growth (domestic) was a modest 1 per cent during the quarter, far lower than the overall sector growth, which is already a meagre 5 per cent. Private banks have managed to deliver far better growth.

Even ICICI Bank and Axis Bank that have relatively higher exposure to stressed sectors delivered a higher 11-12 per cent growth in loans in the June quarter.

The retail segment for these banks continued to put up a strong show growing 18-22 per cent. SBI’s retail portfolio grew at a slower 13 per cent in the June quarter.

Elevated levels of stress in asset quality and sharp fall in its benchmark MCLR (60 per cent of the loans are on MCLR) has kept net interest margin (NIM) for SBI under pressure.

From 3 per cent last year, NIM has fallen to 2.5 per cent in the June quarter. Some of the pressure is also due to the bank’s notable shift towards corporate bonds (from loans).

Around ₹40,000 crore have moved from loans to corporate bonds over the past year. Given that the yields on loans are higher than that on bonds, it has impacted the bank’s NIM to some extent.

Further shift towards bonds, weak credit growth and pricing pressure are likely to keep margins under pressure.

The management’s guidance of 6-8 per cent growth in loans for FY18, is more or less in line with the system growth, but lower than its earlier guidance of 11 per cent.

SBI’s weak core performance and continuing pressure on asset quality are likely to weigh on the bank’s earnings over the next year.

Published on August 11, 2017

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