State Bank of India is likely to report a subdued quarter when it announces its earnings on November 4, with analysts expecting net interest income (NII) to fall on-year on account of pressure on net interest margins. The public sector lender's profit after tax, however, is expected to rise on-year.
While SBI's credit costs may remain stable, asset quality is expected to improve.
SBI's net interest income is likely to fall 8 percent on-year to Rs 38,020 crore in the second quarter as net interest margins (NIM) contract and the cost of deposits catch up, according to the average estimate of seven brokerages.
NIM is the difference between interest income from assets and interest expenses incurred on liabilities. It measures the effectiveness of a company’s investment decisions.
The lender’s net profit is expected to rise by 7 percent on-year to Rs 14,221 crore. Sequentially, profit may fall 15 percent on the back of lower treasury gains and an uptick in provisions due to a low base in the first quarter and prudential provisioning.
Provisions refer to funds set aside to cover potential losses or expenses likely to be incurred in the future. Treasury gains for a bank typically refer to income generated through treasury or investment activities. Increased investment is expected to result in higher operating expenses.
PPOP seen declining
SBI's pre-provision operating profit (PPOP) is expected to decline 19 percent YoY to Rs 20,244 crore due to higher operating expenses and lower treasury income. PPOP represents profit before accounting for provisions for loan losses and other non-operating items.
According to analysts, despite some pressure, NIMs are expected to remain largely stable, given the structure of the loan book and the negligible need for deposits to fund this growth. SBI's provisions, however, will be higher sequentially.
Recoveries to be positive
Analysts at Kotak Securities expect slippages to represent approximately 1.5 percent of loans in this quarter, with a reduced impact from priority sector lending compared to the previous quarter. However, recoveries and upgrades are likely to be good in the September quarter.
The brokerage said credit costs may rise marginally as the portfolio starts to normalise.
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Asset quality to improve
Brokerages expect loan growth to gain momentum as systemwide credit growth picks up. Phillip Capital said the lender may make provisions for wage revision at Rs 480 crore per month.
SBI's asset quality is seen improving, supported by a low-stressed asset pool. The lender's advances are likely to grow 11-14 percent YoY on a larger base.
The key focus areas in the results include NIM, return on equity, unsecured loans, capital adequacy ratio, asset quality outlook and loan book traction.
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