ANALYSTS FIND STATE BANK OF INDIA’S FY20 PLAN CREDIBLE

Gains from higher credit offtake, robust financial profile and control on costs set to aid growth

State Bank of India (SBI) seems to be taking the ~77.18-billion loss in the March 2018 quarter in its stride with the bank's chairman Rajnish Kumar expecting better days ahead. “The year gone by was one of despair, the current year is one of hope and FY20 will be the year of happiness,” Kumar said on Monday during a post results conference. He expects gains from higher credit growth, robust financial profile and control on costs. Despite SBI’s poor numbers, the stock market has taken an optimistic view of the outlook. The stock gained about 10 per cent in three trading sessions after announcement of results on Tuesday. According to analysts, the targets for FY20 set by the country’s largest lender are credible and within reach. The clean-up of the balance sheet involving recognition and provisioning for bad loans is almost through. While retail credit, which was 57 per cent of the total loans in FY18, is growing at a healthy pace, its leadership position in corporate lending, for which demand is picking up, will also stand in good stead. Kumar said his top priority was to make the bank's credit profile strong. SBI would work to bring down the share of gross non-performing assets (NPAs) below 6 per cent by March 2020, from 10.91 per cent at the end of March 2018. Besides improving recoveries, the level of provisions for bad loans would be strengthened further to over 60 per cent by the end of FY20, from 50.38 per cent in March 2018. This will help reduce net NPA levels below 2.3 per cent in FY20 from the current 5.73 per cent. SBI was better positioned amongst peers to capture emerging opportunities amidst slackened competition, Edelweiss Securities said in the note. “These were challenging times for SBI, manifested in a temporary lull in earnings due to systemic asset quality risks. However, earnings seemed to have bottomed out in Q4FY18,” it added. SBI expects to improve net interest margins (NIMs) to above 3 per cent by March 2020, from 2.67 per cent in FY18, by leveraging pricing power and optimising the riskreturn matrix. That would entail increasing the credit-deposit ratio and lowering slippages to improve margins. Between April 2015 and March 2018, the bank had to reverse some of its interest income on a substantial amount of loans that slipped into the non-performing category.

The bank is expecting credit costs, the amount set aside for bad loans, to come down on better credit monitoring and timely debt resolution plans

Analysts said the bank’s cost of funds was low, and it was at an advantage due to its financial muscle, scale and domain experience across sectors. This gave the lender room to charge higher interest rates on some loans, they added. Many weak public sector banks are facing restrictions on lending since the Reserve Bank of India has put them under its Prompt Corrective Action (PCA) framework, thereby restricting their ability to lend. Also, large private sector corporate lenders have burnt their fingers and will be cautious in lending. All this gives the country’s largest lender an edge in the market despite competition. Looking at better economic prospects, SBI hopes to clock credit growth of over 12 per cent in FY20, up from just 4.9 per cent in FY18. It will also lay emphasis on giving loans to better rated corporates, with lesser provisioning requirement. The share of risk-weighted assets in gross advances would trend lower — it has declined by 780 basis points from 78.94 per cent at the beginning of April 2017 to 71.17 per cent by the end of March 2018. SBI is also expecting credit costs, the amount set aside for bad loans, to come down on better credit monitoring and timely debt resolution plans. Much of the provisions for stressed assets have been made between FY16 and FY18, and the incremental burden of provisions for dud loans will be considerably less going forward. HDFC Securities said in a note that SBI's performance for FY18 showed that asset quality deterioration was actually better than feared. With a breakthrough in one bankruptcy case (Bhushan Steel) and a few more nearing finalisation, SBI can be one of the biggest beneficiaries. “This provides upsides to our elevated assumptions on slippage (and credit costs) over FY20E,” it added. By posting a loss of ~65.47 billion for FY18, SBI’s return on assets moved into the negative territory. The bank expects a positive return on investment this year, and at 1 per cent for FY20. SBI executives said the bank would also work on increasing the share of low cost deposits, current account and savings accounts (CASA). “Within this, the emphasis will be to increase the share of current accounts,” an official said. The bank does not have to pay any interest on current accounts. SBI has factored in the impact of shifting to the new accounting standards (IndAs). Under the new rules, provisioning for stressed loans is based on expected loss and not on an accrual basis.