While the worst of the bad asset problem may be behind, the effect might linger on for three more quarters.
Surprises are becoming more common in State Bank of India’s quarterly numbers in recent times. While in the first quarter of FY19, retail slippages spiked up on account of the merger with associate banks; the quarter under review saw RBI’s divergence related slippage, rather unusual for the most revered state-owned banking entity. This coupled with the lower treasury gains and higher provision (loan loss as well as investment depreciation) resulted in SBI reporting a net loss.
The bank definitely is on the right track with respect to a very healthy pool of low-cost deposits and is raising significant capital in the coming quarters to well equip itself for the upcycle. However, as NPA resolution moves to high gear, incremental provisioning would be contingent on the fate of IBC (insolvency resolution) cases. While the worst of the bad asset problem may be behind, the effect might linger on for three more quarters.
Hence stock price volatility cannot be ruled out in the medium term. However, all efforts are in place for a recovery in the second half of FY19. Investors should therefore buy the dips with an eye on the long-term.
Quarter at a glance
The core performance was uninspiring
The Net Interest Income (difference between interest income and interest expenses) grew by 5.2% year on year as advances grew by 2.5% and interest margin declined, although stable from the level of the previous quarter. There was some interest reversals due to significant increase in NPA as well.
Non-interest income declined by 30% driven by much lower treasury income (Rs 1026 crore compared to Rs 4900 crore).
Operating expense was well contained despite the bank providing for higher wages. The staff strength of the bank is steadily declining and would fall further as the bank is not replenishing the staffs who are retiring. However, the lower income resulted in a spike in the cost to income ratio.
Consequently, the operating profit declined by little over 18%.
RBI’s divergence led spike in slippages
There was a sharp increase in slippages mostly from the corporate book. RBI in its annual audit report pointed to bad asset recognition divergence of Rs 23,239 crore (net NPA impact of Rs 17518 crore).
Since there was an upgrade from this pool to the tune of Rs 4338 crore, the total slippage on account of RBI’s divergence report in the quarter was Rs18901 crore, and the rest Rs 6935 crore was slippages outside the RBI list.
According to SBI’s top management, 90% of the assets identified by RBI were part of the stressed asset pool.
The significant increase in provision (Rs 5720 crore on account of divergence) on non-performing loans as well as investment depreciation resulted in the bank reporting a net loss.
The road ahead
Business growth remains subdued – as the quarterly results highlighted, growth in advances as well as deposits remained well below the system at 2.5% and 1.9% respectively. So far the credit growth is driven by home, auto and personal loans with SME showing signs of a pick-up.
With the government moving away from universal banking, large banks like SBI will take a lead in corporate lending in the next upcycle. The bank is preparing for the same – raising Rs 8800 crore from the government (in lieu of the recapitalisation bonds) and planning a massive Rs 20,000 crore capital raise in FY19. SBI will definitely be a bank to watch out for from the PSU pack in the next upturn.
It has a decent liability profile with a high share of low-cost deposits (CASA) over 45%.
However, the next few quarters can still be unpredictable on the slippage as well as provision front.
While the bank is incrementally going after better quality assets, it still has a pool of over Rs 50,000 crore of troubled advances (2.6% of assets) although its watch list has been falling steadily with higher slippages.
Coming to the provision, although the bank has a decent overall provision cover of 66% and a cover of 60% for the cases (outstanding Rs 78310 crore) referred to NCLT 1 & NCLT 2 (national company law tribunal), incremental provisioning would be contingent on the kind of haircut that banks will have to take on the resolution of bad assets.
The resolution is mostly expected to take place in the first half of FY19.Brace for some volatility in numbers for couple of more quarters.
The bank is guiding to lower credit costs – 2% in FY19 and 1.5% in FY20 and improvement in return ratios. We do not disagree with the projected improved outlook post this rough patch.The stock trades at 1.6X FY19 book and should get re-rated post this difficult phase. Hence, investors should accumulate the weakness in the stock with an eye on the long term.