SBI's asset quality — Can investors digest this shocker?
Markets will be watchful unless there is meaningful reversal of the “one-offs” that management confidently guided to.
An unexpected disappointment from the banking bellwether State Bank of India is unlikely to go down well with the street. In addition to a weak operating performance that was largely attributed to merger pangs; asset quality was a shocker, especially since the slippages were driven by retail. While the franchise is strong, well-capitalised and more tech-savvy than many of its public sector peers and have decent value in subsidiaries; markets will be watchful unless there is meaningful reversal of the “one-offs” that management confidently guided to.
Result at a glance
Core performance was weak. Net Interest Income (difference between interest income and expenses) de-grew 3.5% as advances grew by a minuscule 1.5% and Net Interest Margin declined by 48 basis points. Other income was impacted by one-off gains in Q1 FY17 (NSE stake sale), although the mid-teen growth in core fees was on expected lines. Cost was largely contained. Consequently, operating profit de-grew by 13.7%.
The optically higher profitability was attributed to significantly lower provision – loan loss provision grew by a meagre 7.6% despite significant fresh stress in asset quality and there was a large reversal in standard assets provision as well.
Losing market share
The reported credit growth was a dismal 1.5%. What is interesting is that in the past one year, SBI’s share in incremental credit stood at 6%, which is almost one-third of HDFC Bank and comparable to mid-sized private sector entities. We hope, the 50 basis points reduction in savings banks rate aids the bank in grabbing market share that it is losing fast to competition in the MCLR (marginal cost based lending rate) regime.
The management mentioned that since top-rated corporates are moving to the market, the bank has increased exposure to Corporate Bonds and Commercial Paper. The bank has guided to 6-8% credit growth for full year, which points to recovery in the second half.
The significant decline in margin was attributed to the MCLR regime. Out of the floating book of close to 90%, around 60% are now linked to MCLR. The decline in Credit to deposit ratio from 81% to 72% and the substantial surge in slippages also impacted margin.
While the management has guided to 10-15 basis points improvement in NIM, the task may be challenging. While some savings is expected from reduction in savings deposit rates, this might get offset as the bank goes aggressive in the market where rates are finer. Asset quality remains a joker in the pack in this assumption.
Asset quality – retail slippage, the new headache
While the corporate watch list was largely known, the shocker came from the retail slippages. Of the total slippage of close to Rs 26,249 crore – only Rs 8368 crore came from the corporate accounts (primarily one large corporate account of Rs 4300 crore and mid corporate account of Rs 3200 crore) and 95% was from the watch list. What was completely unexpected was the slippage to the tune of Rs 17,886 crore from retail – 35% from SME, 40% from agriculture, 14% from housing and 11% from the personal segment.
The management attributed the fiasco to myriad factors like merger related preoccupation of the management and lack of alignment of systems with the newly merged entities, moral hazard problem in the wake of agri loan waiver and inability of staff to follow-up on retail account recovery due to the merger work load.
The management sounded confident of a complete reversal of retail slippages by FY18 and hasn’t provided for it as it expects at least Rs 3000 crore recovery from states on agri loan waiver, some support from Southern states pertaining to education loans and upgrades in home & personal loans.
We remain cautious as we do not agree that slippage of this magnitude (guidance of Rs 30,000 crore slippage for the year) can be resolved with follow-ups especially since SME segment might continue to reel under GST related stress.
While the overall watch list (corporate) stands reduced, we still expect the full year slippage to be in excess of Rs 68,000 crore (Rs 1,10,247 crore) last year.
SBI’s total exposure to RBI referred NCLT (national company law tribunal) cases is Rs 50,000 crore (total 6 cases) entailing a total provision of Rs 8571 crore. The management has budgeted for Rs 5034 crore, but the remaining will have to be dealt with. In addition to these, 6 more cases are being referred to NCLT and the requisite provision will have to be created, going forward. For all practical purposes, the pain might not end right now.
CASA and subsidiary performance remain bright spots
The growth in deposits remains healthy and SBI has a decent 29% share in incremental deposits. The average CASA (current and savings account) remains at a healthy level of 43.8%. The performance of subsidiaries was reassuring and the IPO (initial public offer) of SBI Life Insurance remains a near-term trigger. Having raised Rs15,000 crore by way of a QIP (qualified institutional placement), the Capital Adequacy Ratio stands at a decent 13.31% for the bank that should take care of medium term growth.