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The share price of State Bank of India (SBI), the country's largest lender, has fallen 26 per cent to Rs 1,475 since July. Unlike many other heavyweights which have become attractive after the recent beating, not many believe SBI's shares are attractive, despite the fall. The ratio of impaired loans for the entire banking sector jumped 75 basis points to 10 per cent at the end of June. If this be the case, then the going is only going to worsen for the country's largest lender.
With the Reserve Bank of India's recent tightening and economic growth plummeting in the first quarter to 4.4 per cent, the sector's woes are expected to rise. Morgan Stanley expects impairments to be meaningfully higher than their base case estimate of 12.5 per cent by FY15. Given that companies will continue to struggle in a difficult macroeconomic environment, analysts expect corporate lenders to struggle.
SBI's first quarter performance provides evidence of such a trend playing out. In the first quarter, SBI shocked the market with its slippage (fresh accretion of bad loans) of Rs 13,760 crore, way ahead of the market's estimates. Although SBI indicated in the next quarter slippages to the tune of Rs 2,000-2,500 crore could be upgraded, analysts believe the process could be slower than expected. The management has not given any guidance for slippages in the current financial year as it believes asset quality pressures will persist due to the slowdown. According to Antique Stock Broking, the bank's total restructured book stood at three per cent of advances at the end of the first quarter. The corporate debt restructuring pipeline for the second quarter stands at Rs 10,000 crore (related to iron and steel, road and the power sector), adds the brokerage.
The bank's profitability is also expected to take a hit in the coming quarters on rising expenditure and higher bond yields. Morgan Stanley does not expect the average profit after tax over the next three quarters to be materially higher than Rs 2,000 crore. "This will be driven by weaker asset quality (51 per cent coverage and huge impaired loan formation); likely fall in net interest margins (falling spreads/loan-deposit ratio); rising operational expenditures and higher bond yields (mark-to-market losses of Rs 1,300 crore according to management)."
