State Bank of India: Pain is likely to persist
Though Q2 results disappointed the Street, ~10,341 cr slippage was the biggest shocker
It’s the fourth straight quarter of decline in net profit of State Bank of India. Not just that, the September 2016 quarter (Q2) also missed Street estimates on most parameters. Net interest income, at ~14,437 crore, was flat in Q2 and net interest margin for domestic operations was down 27 basis points (bps) year-on-year to 3.05 per cent. Despite noninterest income increasing by 36 per cent to ~8,428 crore due to treasury gains and fee income growth, it was inadequate to support net profit, which declined by 34 per cent to ~2,538 crore. Provisioning for bad loans doubled to ~7,670 crore, showing little signs of improvement in the bank’s asset quality.
The granular details emerging from the Q2 numbers may be more alarming. For a start, gross non-performing assets (NPA) doubled from a year-ago level to ~1,05,783 crore in Q2; sequentially it was up nearly ~4,000 crore. As a result, despite doubling the provisioning for Q2, net NPA at ~60,013 crore trebled compared to year-ago figures (sequentially too it was up by about ~2,600 crore). As loan base is growing at a much slower pace (up 8 per cent year-onyear in Q2 to ~14,81,831), the NPA ratios look elevated. Gross NPL rose from 4.15 per cent a year ago to 7.14 per cent in Q2, while net NPL stood at 4.19 per cent versus 2.14 per cent in Q2FY16.
What’s more worrisome is there seems to be little stopping in the creation of loan slippages. At ~10,341 crore, slippages have almost doubled, compared with a yearago level and remain higher against June quarter level. The only positive is the addition to slippages is accruing from the watch list (~31,400 crore in Q1) and with this the watch list has reduced by 25 per cent. Total slippages so far in FY17 stacks up to ~19,131 crore and represent 30 per cent of slippages recognised in FY16. Analysts say this indicates that incremental addition to slippages may cool-off, though it would continue to persist in FY17.
But what needs close monitoring is the bank’s success with upgradation of bad loans and recoveries. While recoveries at ~1,344 crore in Q2 were down sequentially from ~1,634 crore, loans upgrades stood at ~206 crore versus ~1,169 crore in Q1FY17; lowest in recent times. Shweta Daptardar of KRC Research says lower recoveries and upgrades, and higher slippages in Q2 were more disappointing than even the headline NPA deteriorating. Added to this, credit cost rose to 203 basis points in Q2 from 168 basis points in Q1.
With this, analysts say that even if there is a meaningful growth in advances and reduction in slippages, profitability may remain muted. “Return ratios may take a hit going forward, given that on a consolidated level, the bank incurred losses in Q2,” says Suresh Ganapathy of Macquarie. With these concerns looming over SBI, analysts say the 20 per cent stock price appreciation in the last three months compels them to re-look at their target prices as earnings pressure is likely to persist.