From hope to happiness: Analysts find SBI's FY20 plan credible

SBI would work to bring down the share of gross NPA below six per cent by March 2020 from 10.91% at the end of March 2018

State Bank of India (SBI) seems to be taking the Rs 77.18-billion loss in the March 2018 quarter in its stride with the bank’s chairman Rajnish Kumar expecting better days ahead.

“The year gone by was one of despair, the current year is one of hope and 2019-20 will be the year of happiness,” Kumar said.

He expects gains from higher credit growth, robust financial profile and control on costs.

Despite SBI’s poor numbers, the stock market has taken an optimistic view on the outlook as is evident from the stock gaining 7.4 per cent in two trading sessions.

Analysts say FY2020 targets as set by the country’s largest lender are credible and very much within reach. The clean-up of balance sheet involving recognition and provisioning for bad loans is almost through. While retail credit, which was 57 per cent of total loans in FY18, is growing at a healthy pace. Its leadership position in corporate lending, for which demand is picking up, will also stand in good stead.

Kumar said his top priority was to make the bank’s credit profile strong. SBI would work to bring down the share of gross non-performing assets (NPAs) below six per cent by March 2020 from 10.91 per cent at the end of March 2018. Besides improving recoveries, the level of provisions for bad loans would be strengthened further to over 60 per cent by the end of FY20 from 50.38 per cent in March 2018. This will help reduce net NPA levels below 2.3 per cent in FY20 from the current 5.73 per cent.

Edelweiss Securities, in its note, said SBI was better positioned amongst peers to capture emerging opportunities amidst slackened competition. “These are challenging times for SBI manifested in temporary lull in earnings due to systemic asset quality risks. However, earnings seem to have bottomed out in Q4FY18,” it added.

SBI expects to improve net interest margins (NIMs) to above three per cent by March 2020 from 2.67 per cent for FY18 by leveraging pricing power and optimising risk-return matrix. That would entail increasing credit-deposit ratio and lower the slippages to improve margins. Between April 2015 and March 2018, the bank had to reverse some of its interest income on a substantial amount of loans that slipped into non-performing category.

Analysts said its cost of funds is low and is at an advantage as it has financial muscle, scale and domain experience across a range of sectors. This gives it room to charge higher interest rates on some loans.

Many weak public sector banks are facing restrictions on lending as the Reserve Bank of India has put them under its prompt corrective action framework restricting their ability to lend. Also, large private sector corporate lenders have burnt their fingers badly and will be cautious in lending. All this gives the country’s largest lender an edge in the market despite competition.

Looking at better economic prospects, SBI hopes to clock credit growth of over 12 per cent in FY20, up from just 4.9 per cent in FY18.  

It will also lay emphasis on giving loans to better rated corporates, with lesser provisioning requirements. The share of risk-weighted assets (RWAs) in gross advances would hence trend lower – it has declined by 780 bps from 78.94 per cent at beginning of April 2017 to 71.17 per cent by end of March 2018.

SBI is also expecting credit costs – the amount set aside for bad loans - will come down on better credit monitoring and timely debt resolution plans.  

Much of provisions for stressed assets have been made between 2015-16 and 2017-18 and the incremental burden of provisions for dud loans will be considerably less going forward.

HDFC Securities in a note on SBI’s performance for FY18 said the asset quality deterioration is actually better than feared. With a breakthrough in one bankruptcy case (Bhushan Steel) and a few more nearing finalisation, SBI can be one of the biggest beneficiaries. “This provides upsides to our elevated assumptions on slippage (and credit costs) over FY19-20E,” it added.

By posting a loss of Rs 65.47 billion for 2017-18, SBI’s return on assets (RoA) moved into negative territory. The bank expects a positive RoA this year and take it to about 1 per cent for FY20.

SBI executives said the bank would also work at increasing share of low-cost deposits - current account and savings accounts (CASA). “Within this, the emphasis will be to increase the share of current accounts,” an official said. The bank does not have to pay any interest on current accounts.

SBI has already factored in the impact of shifting to the new accounting standards (IndAs). Under the new rules, provisioning for stressed loans is based on expected loss and not on the accrual basis.  

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