State Bank of India’s profit drop amplifies bank gloom
State Bank of India's third-quarter net profit plunged 62%, as the nation's largest lender set aside more money to cover bad loans amid deepening gloom over the health of public sector banks.
SBI's profit fell to Rs.1,115 crore in the three months ended 31 December from Rs.2,910 crore a year ago. On a sequential basis, profit fell 71% from Rs.3,879 crore in the preceding quarter. The profit fell far short of expectations. The bank had been expected to post Rs.3,300 crore of net income, based on a Bloomberg poll of analysts. Investors hammered SBI shares, which closed 2.99% down at Rs.154.20, on a day the BSE Sensex declined 3.4% to 22,951.83 points.
SBI, which warned that more pain is likely, is the latest in a string of government-controlled lenders to report dismal third-quarter earnings-the result of a Reserve Bank of India (RBI) directive to banks to classify visibly stressed assets as non-performing assets (NPAs) and set aside money to cover the risk of default.
The impact of the directive, which followed an asset quality review by RBI, on the earnings of SBI and other banks shows that lenders have been sitting on a pile of stressed assets that they have avoided recognizing as risky until now.
For 30 of the 39 listed banks that have reported third-quarter earnings so far, gross NPAs have risen 26% between the September and the December quarters; provisions have surged 74% and aggregate net profit has dropped 42%.
At SBI, loans worth Rs.20,692 crore slipped into the NPA category during the December quarter, more than triple the Rs.5,875 crore that turned bad in the September quarter. This pushed up SBI's gross NPA ratio, as a proportion of all loans, to 5.1% from 4.15% at the end of the September quarter.
To manage these bad loans, the bank set aside Rs.7,645 crore in the quarter, of which about Rs.4,300 crore was used to provide for assets that turned bad under the parameters specified by the RBI's asset quality review.
After the increased provisioning, net NPA ratio for December quarter stood at 2.89% of total assets, increasing from 2.14% in the September quarter.
There may be more pain to come, warned Arundhati Bhattacharya, chair of SBI. "We may see a similar amount of provisioning in the next quarter (JanuaryMarch). There are accounts that may have been classified as NPAs in other banks but not by us yet. So, these could happen in the next quarter," said Bhattacharya.
In absolute terms, gross NPAs for the third quarter rose 28% to Rs. 72,791 crore from Rs. 56,834 crore in the second quarter. According to Bhattacharya, one reason these accounts had to be classified as NPAs was that the loan recovery process takes too long. Based on SBI's experience, resolution through the debt recovery tribunals (DRTs) sometimes takes as long as 60 months, she said.
But classifying an account as an NPA does not imply that recovery efforts will stop.
"A lot of these accounts which have slipped are chunky, large accounts which can be recovered. Just because we have classified them as NPAs and provided for them, does not mean that we will stop our efforts to recover," said Bhattacharya.
A large part of the slippages (new loans turning bad) during the quarter were from the bank's large corporate loan book, which contributed 11.2% of its gross NPAs, compared with only 1% in the previous quarter.
Of the Rs.20,692 crore in loans that slipped into the NPA category in the third quarter, about Rs.14,722 crore worth of loans were reclassified following the regulator's review, said the bank.
"Earlier, we were expecting slippages to show flat growth on quarter-onquarter basis. Closer to the results we had revised our expectations to a higher number than September," said Ravi Shenoy, assistant vice- president of midcaps research at Motilal Oswal Securities Ltd. "However, Rs.20,000 crore was clearly a negative surprise. Today's drop in share price would have built in all these surprises, and we are not expecting too much of a negative impact on the stock after this," he said.