SBI's slippages ease, but no comfort yet

While slippage ratio was down to 1.85%, operational growth was muted in Q2

Despite a lacklustre performance, the SBI stock gained over six per cent on Friday as the Street rewarded the bank for its ability to curb the slippage ratio (accretion of fresh bad loans as a percentage of total loan book) to 1.85 per cent in Q2, as against 5.38 per cent in the June quarter. 

This is the best show by SBI to curb bad loans in the past five-six quarters and has bettered peers on this front. Interestingly, provision coverage ratio also saw a sequential improvement to 65.1 per cent in Q2. 

Nonetheless, the Street’s reaction appears exaggerated as core operations were weak. Net interest income grew by just 2.6 per cent to Rs 18,586 crore, aided by lower cost of funds at 5.5 per cent from 6.18 per cent a year ago. Net profit stood at Rs 1,582 crore against a loss of Rs 557 crore a year ago. Save for Rs 8,566 crore of gains from the SBI Life initial public offering (IPO), the bank might have run into serious trouble yet again in Q2 as provisioning costs remained high at Rs 18,418 crore; a jump of 27 per cent year-on-year (y-o-y) and 87 per cent sequentially. 

A large chunk of Q2’s provisioning cost (Rs 5,976 crore) may be attributed to the Reserve Bank of India’s (RBI’s) additional provisions for companies under the Insolvency and Bankruptcy Code (IBC). SBI has fully provided for the first list, while it has exposure of about Rs 26,636 to the second list. According to SBI, these accounts have been adequately provided for, which somewhat insulates from high provisioning costs on the IBC-related accounts. However, the ongoing RBI audit on SBI’s loan loss recognition for FY17 may keep the overall provisioning high in the December quarter if the exercise springs up new surprises. On a positive note, SBI expects much of the fresh NPA (non-performing assets) addition to happen from its corporate watch list that reduced from Rs 24,444 crore in June’17 to Rs 21,288 crore in Q2. 

This still doesn’t make up for Q2’s weak loan growth; a key factor that ate into the SBI’s core performance. India’s largest corporate lender witnessed a near six per cent shrinkage in its corporate loan book in Q2, because of absence of credit demand from India Inc. Therefore, SBI’s dependence on its retail loan book which grew by 13 per cent y-o-y in Q2 will remain high in the near- to medium-term. While retail loans will be important to keep the credit growth afloat, whether the gamble pays well for SBI needs monitoring. Retail gross NPA ratio rose from 1.08 per cent a year-ago to 1.41 per cent in Q2. While this is still small considering overall gross NPA ratio of 9.83 per cent in Q2 (9.97 per cent in Q1), deterioration in retail asset quality will be a new headache to handle. 

Also, intense competition, particularly for retail loans, could delay any noteworthy recovery in SBI’s core performance by a few quarters.