The recently concluded September quarter results of leading public sector banks were no different from the previous quarters. Sluggish loan growth, weak margins and dodgy asset quality continued to weigh on the earnings of most State-owned banks.

But for State Bank of India (SBI), the country’s largest lender, a relatively better performance on the asset quality front and a marginal pick up in lending were positives. The bank reported lower addition to bad loans in the September quarter, in contrast to peer Bank of Baroda (BoB), which saw a sharp rise in slippages. SBI’s asset quality performance too, has been better compared with its peers in the last couple of quarters. After the bank’s gross non-performing assets (GNPAs), as a per cent of loans, peaked at 5.7 per cent during the December 2013 quarter, it has been falling steadily, thanks to efforts to contain additional slippages. As of September, the bank’s GNPA stood at 4.15 per cent of loans.

Also, SBI’s restructured assets, at about 3.8 per cent of loans, are much lower compared with the 6-10 per cent for other public sector banks. While SBI’s lumpy exposures to stressed sectors, such as infrastructure, can lead to sudden and sharp rise in slippages or additions to restructured assets, it is better placed to weather shocks. SBI remains one of the better capitalised public sector banks with Tier-I ratio of 9.9 per cent.

SBI’s pick up in loan growth in the September quarter also places it a notch higher than peers, such as PNB and BoB that continue to report weak loan growth (below industry).

In the last six months, the SBI stock has fallen 12 per cent along with the broad market indices. At the current price, it trades at 1.3 times its standalone one-year forward adjusted book value (excluding value of its subsidiaries at about ₹70 per share). This is lower than its historical five-year average of 1.6 times.

A gradual pick up in economic growth should help ease asset quality pressure and boost core income. The SBI stock offers investors a good opportunity to play the recovery theme over the next two to three years.

Growth in lending

After languishing at 6-7 per cent levels in recent quarters, the bank’s loan growth improved to 10.3 per cent year-on-year during the September quarter. The growth was led by the retail and large corporate segments that grew 17 per cent and 22 per cent, respectively.

Among the public sector banks, SBI has the highest share of retail loans (21 per cent). Market share gains in the home and auto loan segments should aid growth in the retail segment. While the recent pick up in lending activity is a positive, SBI still lags the growth levels of leading private banks and, hence, a consistent improvement in credit offtake will be crucial.

Moreover, given the sharp cut in base rate — to which all lending rates are pegged — the bank will continue to see some pressure on its margins. SBI has a healthy low-cost deposit base with current account, savings account (CASA) forming 42 per cent of total deposits. But the bank also has a higher share of floating rate loans which, given the recent base rate cuts, is likely to put margins under pressure. SBI’s net interest margin in the September quarter fell about 20 basis points over the same period last year, due to a fall in yield on loans.

Economic revival to help

However, in the long run, SBI is well placed to deliver better margins. A revival in investment activity in some of the core sectors should lead to healthy growth in the bank’s high-yielding corporate segment.

Moreover, a large portion of SBI’s loan delinquencies is from the SME, mid-corporate and agricultural segments — GNPAs in these segments was high at 8.7 per cent, 10.6 per cent and 8.6 per cent respectively, in the September quarter.

Within the corporate segment, a major portion of slippages are from stressed sectors, such as iron and steel, infrastructure and textiles.

A possible revival in these sectors should lead to improvement in asset quality and hence, earnings.

While leading private banks continue to outpace public sector banks on loan growth and asset quality, they also trade at a steep premium.

Within the PSU space, there are many banking stocks that are available cheap — at less than book value. But they also carry the risk of erosion in capital, owing to steep deterioration in asset quality. SBI is attractively valued and is better placed to benefit from a revival in the economy, given its size, entrenched presence in lending to large corporates and key sectors, and strong retail footprint.

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