SBI: Stakes too high to disappoint investors

Easing of corporate sector stress in Q3 gave the much-needed relief

In an environment where investors aren’t preferring to own state-owned entities, including banks, the stock of State Bank of India stands out as an exception. Not only is it analysts’ most preferred public sector bank (PSB), but also turning out to be the most-owned PSB. In fact, with 51 of 54 analysts polled on Bloomberg recommending “buy” (or 94 per cent of analysts polled), bets on the bank is higher than what it enjoyed in 2005, when 92 per cent of analysts tracking the stock were positive on it. In other words, SBI’S stock is basking on optimism never seen before, which brings investors to the question of how sustainable is this optimism in the current environment.

Sentiments started turning in favour of India’s largest bank since the start of the current financial year. But, what cemented the faith was its December quarter (Q3) results, when its gross and net non-performing assets (NPA) ratio touched a low of 6.94 per cent and 2.65 per cent, respectively. Helped by write-back in provisioning, domestic net interest margin rose to 3.6 per cent in Q3, up 70 basis points (bps) year-on-year and at these levels, profitability turned to its best level since FY16. Likewise, while the headline loan growth numbers at 7.4 per cent may not appear too encouraging, its retail growth rate (led by home loans) at 17.5 per cent year-onyear in Q3 presents a convincing picture. Not just that, the share of retail loans to overall loans at nearly 60 per cent was also at an all-time high in Q3. While one could say that the quarter saw a generous helping from Essar Steel recoveries (~12,000 crore), it still doesn’t take away the fact that SBI put up its best-in-recent times show in Q3.

On the flip side though, the biggest concern is that of the emergence of fresh pain. Q3 numbers would have been much better if not for the ~16,500-crore fresh pain (or slippages) recognised in the quarter on account of provisioning made towards Dewan Housing. Consequently, the slippages ratio rose to 3.75 per cent in Q3, from 1.71 per cent in Q2. In the March quarter, SBI expects corporate slippages to be curbed at ~1,200 crore, while overall slippages aren’t expected to be more than ~5,000–6,000 crore, resulting in overall slippages of ~30,000 –35,000 crore in FY20. The other unknown is its telecom sector exposure, particularly ~16,000 crore (0.7 per cent of total advances) lent to Vodafone Idea and according to analysts at JP Morgan, this is the key downside risk to their “buy” suggestion on SBI’S stock.

Also, with the economic slowdown showing little signs of easing, given its size and exposure to most corporate accounts in the country, SBI remains vulnerable to trouble from unknown quarters.