State Bank of India (SBI) has turned in another quarter of poor performance with its net profit for the period ended June 30 registering a fall of 45.6 per cent year-on-year. This is not the end of the pain; there is more to come by way of catching up on provisioning mandated by the Reserve Bank of India (RBI). Though the provisioning coverage ratio is up at 67.25 per cent, it remains short of the 70 per cent that the banking regulator requires. The bank has also been affected – this is not specific to it – by rising interest rates, which has required provisioning for depreciation in the value of investments. Treasury operations have resulted in a net deficit of Rs 840 crore, compared to a surplus of Rs 675 crore in the corresponding period. This alone accounts for Rs 1,515 crore when net profit has shrunk by Rs 1,313 crore.
Poor as these results are, there is a silver lining to them. The bank’s net interest margin has gone up 55 basis points to 3.62 per cent and the scheduled retiring of some high-cost deposits that were contracted during the Lehman crisis should offer more breathing space in the immediate future. Borrowing (taking deposits) and lending constitute the bread-and-butter business of banks, so improvement in the margin of this operation augurs well for the sector. Performance in the accretion to this business has been mixed. The bank has claimed a rise in its market share of advances but has recorded a fall in the share of cheap (current and savings account) deposits in overall deposits. This is an area to watch, since the sluggishness creeping into the overall economic activity – this will affect all banks – as a result of there being no sign of an end to the monetary tightening underway cannot be good for business growth. On the face of it, there has been an alarming rise in non-performing assets in the past two quarters but this can be explained by the familiar change-of-guard syndrome. Banks have considerable leeway in the way they classify assets (why RBI should allow this is a mystery) and the earnestness with which a clean-up job is undertaken depends as much on asset quality as on the tenure of the chief executive.
What is indisputable is that the current pain is resulting in a cleaner balance sheet, which should be good for its investors in the future. There are two ways of looking ahead. Falling capital adequacy ratio is going to make it imperative for SBI to go in for a rights issue, but if the fiscal situation leaves little in the hands of the government to make fresh investments, then there will be a crunch. However, slower economic growth will make for slower growth in assets, so maybe not that much of additional capital will be needed. In the tough times ahead, greater attention will have to be paid to protection of asset quality and margins than defending market share. Also, the bank has much to do to improve customer service despite recent betterment. Greater flexibility in fixing compensation packages will enable SBI to attract better managerial talent.
