SBI's June quarter performance sets high expectations for investors

The lender's strong performance and improvement in moratorium offer comfort

State Bank of India’s (SBI’s) June quarter (Q1) numbers, reported on Friday, surprised the Street, pushing its stock up by 2.6 per cent even as the Sensex fell by 0.3 per cent.

Not only was operational performance better than expectations, but moratorium, a crucial asset quality indicator in the current situation, also improved.

In Q1, net interest income, which grew by 16.1 per cent year-on-year (YoY) to Rs 26,642 crore, was way ahead of consensus estimate of Rs 24,062 crore. Profit before tax, up 36.8 per cent YoY to Rs 5,560 crore, too, beat estimates of Rs 4,863 crore by a mile.

Lower operating expenses and cost of funds, higher treasury gains/stake sale in its life insurance arm, supported operational performance. But, what buoyed investors was a substantial improvement in moratorium book.

From around 23 per cent in the March quarter, SBI’s moratorium as a percentage of term loan book fell to just 9.5 per cent, amongst the lowest in the industry. Though lower moratorium does not strictly indicate improved collections or recovery, what is comforting is that customers accounting for 90.5 per cent of SBI’s term loan book (in value terms) have repaid at least two instalments since the start of moratorium.

 

 

Lalitabh Srivastava, deputy vice-president at Sharekhan, says: “Trend in SBI’s moratorium pool is very impressive. Also, its higher provision coverage ratio of 86.3 per cent adequately takes care of its existing book.”

SBI believes its slippages ratio (loans turning bad) will remain at 1.5-1.6 per cent in the base case, as against over 2 per cent in previous quarters and 0.6 per cent in Q1, and could double in case of extreme stress.

Though all the above are positive, a few analysts have a word of caution. “While the overall moratorium picture is encouraging, exact clarity on asset quality, mainly for overdue/SMA accounts, will emerge in next two quarters,” says Bunty Chawla, analyst at IDBI Capital, who also believes that the total Covid-19 provisioning of Rs 3,008 crore looks insufficient in view of the current situation and SBI’s size.

Srivastava concurs. “There is no doubt SBI has made higher provisioning (15 per cent) than the regulatory requirement (10 per cent). However, one needs to wait before drawing final conclusions on asset quality.”

In short, while SBI’s asset quality and credit cost remain under control, the post-moratorium performance be will keenly watched as any sharp deterioration could lead to a correction in the stock. The management also said it remains watchful, but there is no cause for concern as of now.