SBI Q3 disappoints: Experts analyse

Below is the transcript of their interviews

Latha: How would you look at this 28 percent increase in NPL in one quarter, a warning from the bank that they are going to take two quarters to recognise everything that has already been identified as stressed assets, and the fact that we still do not have the SDR and other numbers? So, your initial reaction to this 28 percent increase. It takes the total NPLs to about 5.1 percent. Hazari: Though it is a large increase on a large base, 28 percent, one must remember that ICICI Bank and Punjab National Bank on a worst case scenario was expected in the case of India’s largest bank SBI, so seeing in that context, the market would be relieved that it is not much worse situation. Now, regarding fourth quarter, all banks who have reported disappointing asset quality have all stated that the trends will continue in the fourth quarter, so it is also to be expected in SBI’s case that you will have a similar trend in the fourth quarter. In that respect, asset quality though bad, the market was expecting it to be much worse. But what we have seen, you have seen an impact on the profit and loss account, but in bank, and as in companies, it is the balance sheet which in my opinion is more important than the profit and loss account. And if the provisions have increased very sharply, the cleaning up process has been done which is a positive feature. Latha: To cut a large story short, the stock has given up about 28 percent in the current year. Considering that, do you think that the market has priced in the bad news? Hazari: It all depends on after March, 2016 what does one expect. If you expect the situation to further deteriorate, which is my expectation then obviously, the largest bank in the country cannot be immune from the macroeconomic changes. Now, if you take a call that after March, the economy is going to improve, then by all means, one has to be positive on SBI. So, a lot depends on what is your view on the Indian economy. Ekta: What is your sense in terms of the numbers? Jain: I think the gross NPA number doesn’t look as bad as ICICI Bank in terms of the increase in gross NPAs. However, when you look at the P&L impact of the additional provisions that they have had to take, they had to almost provide for double of the previous quarter and that has had a huge impact on the bottomline. So, just to give a sense, Rs 38 billion was their profit last quarter and this quarter it is only about Rs 11 billion. It is like become one fourth. So, that is quite a huge impact and it is quiet high compared to even what we were expecting. So, from a P&L impact it is bad news. However, on the NPA front, it definitely doesn’t look as bad. Ekta: What have you made of the numbers and just going by the Rs 15,000 crore increase on the absolute gross non-performing assets (NPA) do you think that there wasn’t too much of a sale of loans to asset reconstruction companies etc in order to manage the gross non-performing loans (NPLs)? Sinha: You are right, if you see the net slippage is around Rs 16,000 crore and if we see the run rate, no reduction in terms of write-offs or even up gradation and even cash recovery which is around Rs 5,500-7,000 crore kind of a run rate. So, obviously if you see the gross slippage it is likely to be upwards of Rs 20,000 crore. So, that way it is slightly higher than what we were expecting. We were expecting post other banks results in the range of Rs 15,000-18,000 crore of gross slippage. Still we will look for the exact number when it comes. On the net interest income (NII) front this slight decline is on the expected lines because one or two things are impacting here. First is they had reduced the base rate by 40 basis points in the end of September so obviously that will have impact in this quarter and plus because of the higher slippage you will also have interest rate reversal. These two things are impacting the topline growth. Latha: The main thing I wanted to ask you is, is the relative performance of SBI looking good so now would there be any incremental switch of putting money in SBI rather than ICICI Bank? Sinha: If you ask me we still favour private sector banks where they have higher exposure to the retail portfolio. However, in PSU pack SBI remains our top pick. Latha: You still have a buy rating on the stock? Sinha: We have a buy rating as of now. We will wait for the analyst meet today and then we will take a call on this stock.

Ekta: What is your sense in terms of State Bank of India (SBI) especially in the fact that it is lead consortium lender and multiple strategic debt restructuring (SDR) accounts, how much of asset quality review (AQR) is factored in and how much pain do you think is left?
Agrawal: Clearly the Punjab National Bank (PNB) numbers had made things easier for SBI expectations and there was lot of concern that some ugly numbers can come over here as well. I think the kind of number they have reported is sort of in-line with what our revised expectations were post PNB numbers. Clearly with a coverage of 65 percent it does stand out compared to PSU banks and is pretty close to ICICI Bank as well on gross NPA number. So, in that sense clearly SBI does stand out compared to rest of the PSU pack.

Ekta: In terms of valuations, do you expect it to possibly continue trading at 0.8 times of FY16-FY17 or maybe inch up a little more now? Agrawal: More than the absolute level of valuations, the figures what matter in terms of by fourth quarter, likely a lot of pain would be absorbed by the PSU system. It would be out at least and then the amount of capital that the government gives and with that can FY17 result in fresh lending on slightly lower interest rates. That would really create the foundation for an up move. So, probably we are three months away from getting more clarity with all the bad accounts coming ahead and from there maybe one can relook whether there is a story building up of fresh lending going ahead.