 "SBI's bad debts up, provisions down 600 bps Q-o-Q")
The country's largest bank, State Bank of India (SBI), has stunned the market with its first quarter numbers. The bank's operating profits are down, new bad loan accounts have shot up and provisions have fallen sharply. What has come as a nasty surprise is the sharp jump in bad loans during the quarter to Rs 13,766 crore. Slippages or fresh accretion of bad loans in the previous quarter (Q4 FY13) stood at Rs 5,900 crore and has been at this level for four quarters now.
The stress is also showing in the valuation. The bank is currently trading at one time its adjusted book value, which is a historical low for the bank. Though the stock price has hit a trough, its fortunes are unlikely to change in a hurry.
With the Reserve Bank of India (RBI)'s recent tightening measures, the cost of funds is only set to rise. Since SBI has indicated that it will not increase rates, the pressure on profitability will mount in times to come. The bank's domestic net interest margin has already dipped from 3.2 per cent a year ago to 2.9 per cent. Aalok Shah of Emkay Global believes it will be difficult to maintain margins in the current environment. In the first quarter, SBI's net interest income grew by 3.5 per cent and was driven by sequentially flat margins and 1.4 per cent growth in loans. Had it not been for a 28 per cent jump in other income to Rs 4,470 crore, largely due to treasury gains, the bank's operating profit would have declined further. The bank's operating profit fell 2.7 per cent sequentially and 7.6 per cent year-on-year to Rs 7,551 crore in the first quarter.
Analysts believe bad loans may have risen as the bank would have not been able to restructure some of these assets, which is why it was forced to declare them as non-performing assets (NPAs). It goes without saying the central bank's recent tightening will only aggravate the pain of steadily rising bad loans. The overall figure of stressed assets - fresh slippages and restructured loans - have come in at Rs 18,000 crore in the first quarter, which is well above the Street's estimates. Over the last one year, SBI has been reporting stressed assets (restructured and bad loans) of Rs 13,000 to Rs 14,000 crore on a quarterly basis. What is more worrying is the lower provisions. Despite the sharp run-up in NPAs, the bank's provisioning coverage ratio (the percentage of loans the bank has set aside as provision to cover the bad debt) has fallen by 600 basis points sequentially to 60.6 per cent in Q1. In addition to this, the bank's subsidiaries are also seeing bad debts rise. Analysts believe, going by these developments, the bank will have to raise capital.
The stress is also showing in the valuation. The bank is currently trading at one time its adjusted book value, which is a historical low for the bank. Though the stock price has hit a trough, its fortunes are unlikely to change in a hurry.
With the Reserve Bank of India (RBI)'s recent tightening measures, the cost of funds is only set to rise. Since SBI has indicated that it will not increase rates, the pressure on profitability will mount in times to come. The bank's domestic net interest margin has already dipped from 3.2 per cent a year ago to 2.9 per cent. Aalok Shah of Emkay Global believes it will be difficult to maintain margins in the current environment. In the first quarter, SBI's net interest income grew by 3.5 per cent and was driven by sequentially flat margins and 1.4 per cent growth in loans. Had it not been for a 28 per cent jump in other income to Rs 4,470 crore, largely due to treasury gains, the bank's operating profit would have declined further. The bank's operating profit fell 2.7 per cent sequentially and 7.6 per cent year-on-year to Rs 7,551 crore in the first quarter.
Analysts believe bad loans may have risen as the bank would have not been able to restructure some of these assets, which is why it was forced to declare them as non-performing assets (NPAs). It goes without saying the central bank's recent tightening will only aggravate the pain of steadily rising bad loans. The overall figure of stressed assets - fresh slippages and restructured loans - have come in at Rs 18,000 crore in the first quarter, which is well above the Street's estimates. Over the last one year, SBI has been reporting stressed assets (restructured and bad loans) of Rs 13,000 to Rs 14,000 crore on a quarterly basis. What is more worrying is the lower provisions. Despite the sharp run-up in NPAs, the bank's provisioning coverage ratio (the percentage of loans the bank has set aside as provision to cover the bad debt) has fallen by 600 basis points sequentially to 60.6 per cent in Q1. In addition to this, the bank's subsidiaries are also seeing bad debts rise. Analysts believe, going by these developments, the bank will have to raise capital.