SBI: Difficult times ahead

The news from the State Bank of India (SBI) is not encouraging. The chairman has indicated that there is some increase in non-performing loans and parts of the portfolio are under strain. Most important, it appears that the growth in credit in the March 2009 quarter has been lower than expected, a trend that might result in a further cut in lending rates. In fact, the teaser loans on a host of products including home loans and car loans don’t seem to have attracted many.

That was to be expected as home buyers, in particular, are still waiting for realty prices to fall. But the lower loan growth together with a strong inflow of deposits into SBI, could mean pressure on the net interest margin, not just in the last quarter of 2008-09 but also in the current year. What’s worse, given the downturn, it’s almost certain that non-performing loans (NPLS) will rise sharply. In fact, the deterioration in the credit quality of loans and the need to increase provisions will mean higher costs of credit for the bank.

SBI has stepped up lending in the last three years, a good part of it to SMEs, and as a result, much of its portfolio is unseasoned. The SME sector is typically worse off in a downturn which is why SBI could see a bigger rise in NPLS. In this context, SBI’s loan loss coverage at 48 per cent is lower than its peer group. Macquarie expects SBI’s consolidated net profits to come off to around Rs 11,000 crore from around Rs 13,700 crore in the current year.