State Bank of India: Sell

Many public sector banks continue to reel under slower credit growth, increasing loan delinquencies and margin pressure. The script is not very different for State Bank of India (SBI), the largest bank in the country.

In the last one year, while the Sensex and Bank Nifty delivered returns of 22 per cent and 31 per cent, the SBI stock stayed where it was — a reflection of the challenges facing the bank.

While the bank’s balance-sheet continues to grow, it has not translated into higher profits. Despite loan growth of 20 per cent last fiscal , the net interest income grew only by 2 per cent, primarily due to lower net interest margin.

At the current price of Rs 2,047, the SBI stock trades at 1.3 times its standalone one year forward adjusted book value (excluding value of the bank’s subsidiaries at Rs 545 per share). This is in line with its historical average. Low profitability along with inconsistent asset quality may limit upsides in the stock. Investors can consider exiting the stock.

Muted retail growth

SBI has the largest branch network in the country, with more than 65 per cent in the rural and semi-urban regions. In spite of its strong retail focus among the public sector banks, the loan growth in this high-yielding segment in 2012-13 was below the overall loan growth for the bank.

The share of retail loans in the total loan book stood at 19 per cent, down one percentage point from last year.

During 2012-13, the bank’s loan book grew 20.7 per cent, driven by large corporate loan growth of 40 per cent. Within the corporate segment, the bank continued to lend more to stressed sectors such as infrastructure (29 per cent growth), iron and steel (33 per cent), and textiles (19 per cent).

The retail loan segment, on the other hand, grew by a modest 15 per cent. Home loans which account for a chunk of retail loans grew 16 per cent.

Margins under pressure

With the management’s increased thrust on asset quality, the loan growth may be subdued in FY-14. Continued focus on large corporates and lower retail growth will make loan growth above 17 per cent a tough ask.

Declining lending rates coupled with limited downward revision of deposit rates resulted in margin pressure for most banks in 2012-13.

For SBI, its aggressive (lower) pricing of loans as well as deposits impacted margins which declined 51 basis points to 3.2 per cent.

In a bid to reduce delinquencies, the bank focussed on lending to high rated companies. In 2012-13, most of the growth in loans came from high rated corporates, (investment grade and above), predominantly from those rated A and above.

This led to lower yields as the risks on these loans are lesser. Also, the bank has been aggressive in its pricing, for investment grade companies, to keep up the volumes. As a result, the overall yield on loans declined 50 basis points in 2012-13 to 10.5 per cent.

On the deposits front, the bank has one of the lowest deposit rates. This will limit scope to reduce deposit rates further, thereby putting pressure on the margins.

Thanks to SBI’s higher exposure to stressed sectors, asset quality remains under pressure. The bank’s gross non-performing assets (GNPA) rose 29 per cent to Rs 51,189 crores in FY 2013.

A chunk of its loan delinquencies came from the SME (GNPA of 7.1 per cent), mid-corporate (8.7 per cent) and agriculture (9 per cent) segments.

Stressed sectors such as infrastructure, iron and steel and textiles accounted for most of the slippages in the corporate segment.

High restructured book

While GNPA as a per cent of loans declined 55 basis points sequentially in the March quarter, , this was mainly on account of some write-offs.

Also, considering the management’s continuing concern on the economic slowdown, asset quality will remain a worry.

Of particular concern is the banks’ huge restructured book which doubled in 2012-13 and stood at Rs 32,228 crore. This constituted 3 per cent of loans.

The top three restructured accounts are in the power sector — Suzlon (Rs 1,800 crore), Reliance Power’s Sasan project (Rs 1,060 crore) and Jindal Thermal (Rs 530 crore).

The bank’s high exposure to this troubled sector (loans in this segment grew 46 per cent in 2012-13) increases the risk of additions to restructured book.

The NPAs as a per cent of total restructured book, are currently 25 per cent, indicative of higher risk of slippages in the restructured assets.

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