SBI: Stressed out

Asset quality is deteriorating and could push up the cost of credit.

India's biggest bank, the state-owned State Bank of India is lending but not profitably enough: loan growth for the March 2008 quarter was a good 24 per cent, driven by a 20 per cent growth in the retail portfolio.

But the net interest margin fell 10 basis points to 2.8 per cent because income earned fell marginally after adjustments for one-time accruals. That was partly because prime lending rates were trimmed in February 2008 and also because the bank's bond portfolio is being repriced downwards.

This is despite the fact that cheaper current and savings accounts has gone up as a proportion of total deposits to 43 per cent from 41.1 per cent in the December 2007 quarter. As a result, pre-provisioning profits rose just 10 per cent.

The bank wrote back about Rs 500 crore of pension provisions; adjusting for this profit before tax has fallen.

What's worrying is the deterioration in asset quality: non-performing loans rose 21 per cent sequentially and now stand at 1.78 per cent, with gross NPLs at 3.4 per cent, after write-offs.

The source of bad loans is not just the retail segment but also agriculture and the SME sector and maintaining asset quality will be a challenge for the bank even for its credit card portfolio. With inflation likely to keep interest rates at higher than anticipated levels, SBI's loan growth could moderate to 20 per cent in FY09.

Besides, costs could rise because of lower npl coverage ---at 42 per cent down from 47 per cent in the December quarter--and higher provisioning requirements. As such, net interest margins might contract further.

Also, SBI's strategy appears to be to garner market share partly through expansion of branches and that could keep costs high. At Rs1,779, SBI trades at 1.7 times FY09 price to estimated book value and less than 1.5 times FY10 estimated book value and is reasonably valued.

DLF: At the receiving end

Consolidated revenues for India's biggest listed real estate developer DLF grew a strong 20 per cent sequentially to Rs 4,307 crore in the March 2008 quarter. However, net profits were up just 1.5 per cent at Rs 2,177 crore thanks to bigger interest payments "" up 37 per cent "" on a higher level of borrowings.

Also, profitability in the quarter took a bit of a hit with operating profit margins down nearly 500 basis points at 64.6 per cent. That's because of the greater focus that the realty firm is putting on mid-income housing property: the firm sold more mid-income houses in the quarter which accounted for about 12 per cent of revenues.

Besides, the company's sales to DLF Assets Limited(DAL) ,a promoter group company, were far lower at 42 per cent of sales in the March quarter compared with 53 per cent in the December quarter.

Selling commercial property to DAL is a more paying proposition for DLF. Adjusting for a reversal for the sale of an office that DLF had made to DAL, DAL contributed about 40 per cent to profits; lower than the anticipated levels. Analysts believe the trend could continue with the company's sales to DAL likely to slow down further.

DLF's receivables in the quarter increased by Rs 1,430 crore because of higher construction activity resulting in higher revenues being booked on the percentage completion method. Receivables from DAL have stayed steady through FY08 but those relating to other revenues have increased by Rs 5,500 or about 60 per cent of annual non-DAL revenues.

DLF's land bank is nearly 750 million sq ft and of which about 60 mn sq ft of space is under construction. Most of the firm's exposure of 62 per cent is to the office segment but the share of the residential segment, now at 18 per cent is expected to increase, especially with the mid-income projects having been popular across several cities such as Kolkata, Chennai and Indore.

The stock currently trades at Rs 705 but analysts estimate the net asset value for the firm at lower levels of around Rs 675-700 per share for FY09.