The recovery rate of 40% will have to improve or higher provisioning will hurt.
State Bank of India, the country’s largest lender, seems to have no control over slippages (fresh build-up of non-performing loans). If the sequential increase in slippages is anything to go by, bad loans are on a boil. For instance, fresh slippages stood at Rs 5,645 crore in the fourth quarter of FY11, rising to Rs 6,180 crore in the first quarter of FY12. They have now jumped to Rs 8,000 crore in the second quarter. Analysts are a worried lot, as they believe the bank has no control over slippages, despite setting up account-tracking centres in all its 14 circles to check non-performing assets. The other worrying aspect is that these slippages constitute restructured assets, as well as fresh ones.
Emkay Global’s Anish Damania believes the market would like to get some guidance on slippages and whether these could be arrested, as fresh ones seem to be increasing rapidly quarter-on-quarter. As provisions currently trail slippages, the recovery rate has to be better than 40 per cent of the opening gross NPAs (fresh slippages at the beginning of the quarter). “Given that the slippages are rapidly rising, the recovery rate of bad loans has to improve from the current 40 per cent. For provisions to trail the slippage rate, recoveries will have to pick up from the current levels,” he adds.
Going by the increase in slippages, sooner than later, the bank will have to increase provisioning, too, believe analysts. Not surprisingly, the stock lost 6.76 per cent on Wednesday even as the bank reported a 12.36 per cent year-on-year increase in net profit to Rs 2,810 crore. After SBI’s shocking fourth quarter results, where profits dipped 96 per cent to Rs 20.8 crore, this should come as good news. According to the bank, its net interest margin has reached the highest level of 3.7 per cent, up from 3.30 per cent in the year-ago quarter. However, analysts are not much enthused by this quarter. They believe the bank has shown a profit as it will not only help it shore up Tier-I capital, but also help raise capital.
This is because the increase in BPLR/base rate is 249/224 basis points from the second quarter of FY11, analysts say. Explains Kajal Gandhi, assistant vice-president (research), ICICI Direct: “In the current quarter, SBI is reaping the benefit of re-pricing its loan book. Given that the deposits’ re-pricing had happened earlier, the increase in base rate over the quarter had to reflect in the net interest margin.”