SBI starts new financial year with cleaner slate

While balance sheet clean-up led to a ~77 bn loss in Q4, analysts say worst seems over

Despite State Bank of India (SBI) reporting its highest quarterly loss of ~77.2 billion in the January-March 2018 period (Q4), its share price surged 3.7 per cent to ~254.15. Even as some key financial parameters worsened, other data points made investors believe that the bigger stress for SBI is now behind.

First, of the total corporate slippages (loans turning bad) of ~290.4 billion, 60 per cent was from the stressed pool with the remaining stressed assets put under the ‘watch list’. The Reserve Bank of India’s (RBI’s) new non-performing assets (NPAs) rules, issued in February, require banks to recognise stressed assets as NPAs. Thus, while there was a 1.3-fold sequential rise in slippages in Q4, the stressed pool no longer exists. Overall, even as the watch list (loans with potential to turn bad) was up 2.5 times (at ~258 billion) sequentially, the total worrisome assets (net NPAs, watch list, etc) dropped to 6.7 per cent of advances in Q4 from 8.5 per cent in the December quarter (Q3). SBI also expects not more than 60 per cent of the watch list turning NPAs.

Second, higher provisioning with special mention accounts (SMA)-1 and -2 on the watch list that demand 5-10 per cent additional provisioning and for National Company Law Tribunal (NCLT) accounts provides additional comfort. SMA-1 and -2 accounts give early signs of default, before 90 days. SBI provided 56 per cent for NCLT-1 and 75 per cent for NCLT list-2, which largely covers the amount that may not get recovered. Overall provision coverage ratio (PCR) at 66.2 per cent as of March 2018 is also a good improvement amid higher NPAs. “Even if we assume the entire watch list turns NPA, the given PCR seems reasonable,” says Manish Oswal, senior analyst at Nirmal Bang Securities.

NCLT-1 accounts are likely to get resolved by September 2018. Some may face lower haircut, improving earnings potential due to write-back of additional provisions made, and reducing NPA ratios.

SBI, as of March 2018, had 9.7 per cent (of total advances) exposure to the power sector. Though down from 10.3 per cent in Q3, it can be a pain area if the sector woes aren't resolved soon. SBI, however, has started increasing the share of retail loans (57 per cent as of March 2018), less risky than corporate ones. Also, the share of investment-grade corporate accounts (low default probability) went up.

Even the management’s guidance of less than 1.1 per cent credit cost by FY20, way lower than 3.6 per cent in FY18 and two per cent guided earlier, suggests asset quality improvement going ahead. Meanwhile, the bank expects credit growth of 10 per cent and net interest margin of 2.8 per cent for FY19, an improvement over FY18.