Rate cut may hit SBI profit

Largest lender likely to lose Rs 600 cr interest income in FY09.

The decision of State Bank of India (SBI), the country's largest bank, to reduce its prime lending rate (PLR) may result in the bank losing about Rs 600 crore of interest income on loans in 2008-09. The likely loss in interest income is over 13 per cent of SBI's net profit of Rs 4,541 crore in 2006-07.

The impact of the 25 basis points cut in PLR to 12.50 per cent, just a day before the public sector bank chiefs' meeting with the finance minister on Tuesday, in the current quarter would be just about Rs 100 crore, as interest on most of the loans would be reset during the April-June 2008 quarter.

Canara Bank, the other major lender to cut PLR, is expected to see an interest income loss of about Rs 100 crore. ICICI Bank, the largest retail lender, has refrained from cutting its PLR, as it is saddled with a very high cost of deposits. The second largest bank's cost of deposits was 7.4 per cent at the end of December 2007 against SBI's 5.55 per cent. 
 

PARTY MAY END A quick glance at the performance of State Bank of India
In Rs crore	2003-04	2004-05	2005-06	2006-07
Advances	1,57,934	2,02,374	2,61,642	3,37,336
Net profit	3,681	4,305	4,407	4,541
Deposits	3,18,619	3,67,048	3,80,046	4,35,521
Total assets	4,07,815	4,59,883	4,93,870	5,66,565
Interest received	30,460	32,428	35,980	39,491
Interest paid	19,274	18,483	20,390	23,437
Gross NPAs	12,667	12,456	9,628	9,998
Net NPAs	5,442	5,349	4,911	5,258

SBI's loan portfolio at the end of December 2007 was Rs 3,95,343 crore and that of ICICI Bank Rs 2,15,517 crore.

A senior SBI executive said the PLR cut would result in its net interest margin (NIM) shrinking by about 3 basis points. The bank's NIM at the end of the third quarter of 2007-08 was 2.83 per cent.

The bank hopes that it will be able to bring down its cost of funds, which will help in partially offsetting the impact of the cut in PLR. The bulk deposits it had raised at high rates in the fourth quarter of 2006-07 are maturing now.

With comfortable liquidity in the system, the pricing of deposit renewals is likely to happen at comparatively lower rates.

UCO Bank was the other lender to reduce its PLR and it too may take a hit on its interest income. Other public sector banks have refrained from cutting their PLRs as they do not see it feasible.