SBI Q3 profit seen up 10 per cent

State Bank of India's October-December net profit is seen up 10 per cent on year at Rs 1,015 crore, according to the average of estimates of nine brokerages polled by Crisil MarketWire.

Net interest income for the third quarter is likely to rise 22 per cent on year to Rs 3,393 crore. The net interest income estimates vary from Rs 3,298 crore to Rs 3,417 crore, while the net profit projections range from a low of Rs 857 crore to a high of Rs 1,077 crore.

SBI is expected to announce its quarterly earnings later this month. Growth in loan book and margin expansion are expected to be the highlights of the December quarter.

"SBI has probably the best quality of earnings across the industry," said Siddharth Bhaiya, banking analyst, StratCap Securities.

He feels that strong net interest income and fee income, coupled with a low base effect of last year, will lead to strong earnings growth during October-December.

One of the key concerns at the end of the second quarter or July-September "" the decline in bond trading gains "" has been put to rest with the yields on government securities easing.

Despite intra-quarter volatility, "bond yields at end December 2004 were only 35 basis points higher than September 2004 levels (benchmark 10-year bond yields increased 30 basis points to 6.6 per cent )," said CLSA Asia Pacific Securities.

This is seen as a major positive for the SBI, which has a significant-sized (almost 38 per cent of its assets) government securities portfolio. Brokerage Refco-Sify Securities expects banks like SBI to take a charge in the profit and loss account because of the transfer of securities to the held-to-maturity category.

Motilal Oswal, another brokerage house, expects SBI's gains in bond trading to be stable at Rs 1,200 crore and net interest margin to expand by 15 basis points year-on-year to 3.15 per cent in October-December.

"On a quarterly basis, the growth rates in net interest income of SBI have been very volatile. However, we expect an average loan growth of 20 per cent and net interest margin of 3.1-3.2 per cent over the next few quarters," Motilal Oswal said in an earnings preview note to its clients.

With gains from bond trading likely to be better than expected, SBI is likely to make higher provisions for non-performing assets, said Prabhudas Lilladher, another brokerage house, in its earnings forecast.

SBI had given guidance of a net non-performing asset level of 2 per cent for financial year 2004-05.

Investment bank Merrill Lynch's preview note says that SBI's asset quality could improve due to the recent amendments to the foreclosure law, and likely early resolution of Dabhol power project issue.

The hit on account of the wage revision agreement with the Indian Banks Association is likely to dent SBI's third quarter profit to some extent due to additional provisions.

However, CLSA Asia Pacific estimates that the hit on this account is likely to be in fourth quarter, or January-March.

"The increase in wage cost and arrear provisions consequent to the recent wage settlement with the government bank employees, is also likely to come through this quarter as detailed guidelines are still being worked out," the investment bank said.

In its forecast, Merrill Lynch has raised the price target on SBI shares to Rs 800 a share and on its GDRs (Global Depository Receipts) to $45 a GDR due to recent developments, which could provide 10-15 per cent upside to earnings.

Investment bank UBS Warburg has also increased the target price on SBI shares to Rs 810 a share, based on stronger-than-expected loan growth and easier liquidity in the banking system, which would ease pressure on margins.