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SBI management admitted that while the asset quality concerns persisted in the quarter gone by, they believe it is bottoming out. It also expects some upgrades in its NPA accounts led by improving environment as well as March quarter typically being better. However, analysts don’t seem to be convinced and are not taking it at face value.
Krishnan ASV, Banking analyst at Ambit Capital says given that SBI has often claimed early recognition of impairment as the primary reason for its elevated proportion of non-performing loans, he will look for early indicators on stability in the impairment trends. He adds, “At 1.7 times one-year forward adjusted book value, we retain our sell recommendation on the stock as it offers no margin of safety on continued deterioration in asset quality".
What has made things worse is the slower growth in net interest income (NII). While SBI's loan growth of 15.6% in the December quarter was in-line with Street expectations, its NII fell 3.2% as against expectations of a one% decline. This could be attributed to the bank’s aggressiveness in cutting its base rate. The same has also impacted its net interest margins (or NIMs), which fell 44 basis points year-on-year to 3.4% -- much below the management's guidance of 3.75%.
Again, the management remains confident of improving its margins by March 2013 quarter, but with economic environment weak and cost of funds still high it will not be an easy task for banks, including SBI.
With bad loans rising, it also led to higher provisioning at Rs 2,668 crore (up 10.8%) and impacted profitability. The bank’s net profit though increased by 4% as its non-interest income jumped 76% year-on-year to Rs 3,648 crore. However, this growth was driven by surge in non-core income such as profit on sale of investments and forex gains, which is difficult to sustain in the long run.
Going ahead, it is imperative that the bank starts delivering on its asset quality parameters. Otherwise, the gains for its stock, which has outperformed the markets since September last year, could get capped. At Rs 2,214, it trades in the middle of its historic range of 1.3–2.3 times one-year forward book value.
