India’s largest lender State Bank of India is the latest addition to a growing list of companies, especially banks, announcing quarterly earnings results over weekends (SBI announced Q1 FY23 results last Saturday).

The Street, however, didn’t take the banking major’s June quarter results kindly as its stock price shed about two per cent on Monday. ₹6,550 crore of mark-to-market losses (MTM) and ₹1,500 crore of investment depreciation provisioning, which resulted in seven per cent year-on-year decline in SBI’s net profit in Q1, are the reasons for this correction.

State-owned banks were expected to incur MTM losses in Q1 given the repo rate movement since May 4, 2022. With the highest exposure to money market instruments, SBI, therefore, incurred higher losses vis-à-vis peers.

After at least ten straight quarters of net profit growth, the decline in Q1 is certainly a sentiments dampener and comes at a time when the overall return ratios of the bank is on a improving trend.

But how much should this really matter in the larger scheme of things?

SBI’s balance sheet size is now ₹50 lakh crore. At a time when critiques were questioning how the bank is looking at growing competition from the private players, especially after the merger of HDFC Limited and HDFC Bank which may likely lead to ₹20 lakh crore balance sheet size by FY24, SBI has ensured that the gap between itself and the largest private bank is formidable even ahead of the merger.

At this size, to grow at 15 per cent (retail loans at 19 per cent) year-on-year is appreciable.

What’s also very interesting is the asset quality of the bank, which continues to be on a mend. At 3.9 per cent and one per cent gross and net non-performing assets (NPAs), respectively, SBI’s loan book quality in Q1 was at a multi-quarter best. The bank’s restructured loans at one per cent of total book (₹28,800 crore) also lends comfort.

The most interesting takeaway though is the credit cost guidance maintained at about a per cent (and less than a per cent from FY24). The number came at 0.67 per cent in Q1, further moderating from FY22’s 0.9 per cent. This is an important factor to watch because much of the earnings improvement was on the back of easing asset quality pressures. Consequently, keeping with its guidance, SBI expects to touch 14 per cent return on equity and 0.8 per cent return on assets in FY23.

Maintaining strong growth guidance of 14-15 per cent in FY23 lends support to any further improvement in the return profile of the bank, though the performance of its investment book will be a monitorable.

Weak on profitability

What is working against SBI though is its profitability. Unlike private banks, SBI has a very high share of secured loans, with home loans accounting for over 50 per cent of its retail assets. This is good from a stability and growth perspective, but can be counterproductive on profitability, considering their narrow yield bandwidth.

Likewise, SBI has stayed away from undercutting on pricing of corporate loan segment. But the demand in this segment just about picking up and interest rates are lower than the FY19 levels. Therefore, a combination of these factors could keep SBI’s profitability, measured as net interest margin (NIM), below that of private players.

NIM in Q1 stood at 3.02 per cent, down 10 bps sequentially, due to investment losses.

To mitigate the pressure in forthcoming quarters, SBI has plans to bring down investments in the available-for-sale (AFS) category, now at 40 per cent of total portfolio, and instead build on a held to maturity (HTM) book. Yet, investors should expect NIM to be range bound at 3–3.15 per cent in FY23 given the RBI’s intention to continue with rate hikes.

Value pick

Nonetheless, trading at its one-year forward book value, SBI stock has emerged as the most preferred pick in the banking space, especially since the quality of its balance sheet started improving significantly from FY20. Therefore, any correction can be a good point for investors to accumulate the SBI stock.

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