State Bank of India (SBI) is expected to report robust balance sheet growth, improvement in asset quality and healthy core interest income for the June quarter.
Treasury operations could prove to be the Achilles’ heel of the country’s largest lender in the quarter ended June, for which it will report its earnings on August 6.
An average of the estimates by 10 securities firms shows that SBI’s June quarter net profit would be Rs 7,495 crore, up 16 percent year-on-year.
That would come on 17% growth in net interest income, seen at Rs 32,424 crore for the quarter. This would be one of the strongest growth rates in core interest income (NII) for the bank in recent times.
Interest margin
The increase in NII is driven by the bank’s ability to earn more out of lending and at the same time reduce the amount of dud loans on which it doesn’t earn any interest.
To that extent, movement in the net interest margin also reflects the core interest income besides overall loan growth.
SBI’s NIM remained stable, even improved, in FY22 because of its advantage over peers in having a large base of low-cost current and savings account (CASA) deposits.
CASA as a percentage of total deposits was 45 percent in FY22 with the added benefit that SBI pays one of the lowest interest rates on its savings deposits.
Analysts believe NIM would have remained stable in the June quarter and some expect a sequential improvement.
“Sequential NII growth would be healthy due to positive loan mix changes and yield on advances evolving higher at a faster pace than cost of deposits due to repricing of externally benchmarked loans, implying NIM expansion on sequential basis,” those at Yes Securities Ltd wrote in an earnings preview.
Lending growth
Loan growth is expected to be healthy and in double digits. “Retail growth is likely to remain strong. This, along with a pick-up in the SME (small and medium enterprise) and Corporate book (as the un-utilized limit continues to moderate), will support loan growth,” Motilal Oswal Financial Services Ltd said in a report.
Analysts expect loans to expand by 14-15 percent year-on-year, led by retail and SMEs.
Asset quality, treasury losses
That brings us the asset quality and here analysts seem to differ on the extent of improvement. Those at Kotak Institutional Equities see overall improvement in bad-loan ratios but slippages may come in slightly higher.
“We expect slippages at 1.6% of loans (Rs11,000 crore) mostly driven by SME and retail while corporate will continue to hold up relatively well,” Kotak analysts wrote in their note.
SBI’s slippage ratio was 1.1 percent in the March quarter. Analysts at Axis Securities expect slippages to moderate on a sequential basis.
Yet another factor where analysts seem to differ is the magnitude of treasury losses. SBI has one of the largest bond portfolios dominated by government bonds.
Bond yields surged during the June quarter, resulting in mark-to-market losses to most banks. Considering the size of SBI’s trading book, the mark-to-market hit is expected to be sizeable.
Kotak estimates SBI’s operating profit to drop by a massive 40 percent year-on-year due to treasury losses. In fact, Kotak predicts even the net profit to drop 26 percent, contrary to most analysts who expect an increase. The firm puts SBI’s treasury loss at more than Rs 11,000 crore for the quarter.
The upshot is that SBI’s operating metrics could reflect pain from its treasury book. Investors would keenly follow the management’s outlook on loan growth and asset quality.
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