State Bank Of India Net Profit Drops For 4th Straight Quarter; Asset Quality Deteriorates

State Bank of India’s net profit fell for the fourth consecutive quarter, declining by 34.6 percent in the quarter-ended September.

Net profit fell to Rs 2,538.3 crore from Rs 3,879 crore in the same quarter last year, according to the bank’s filing on the stock exchanges. The consensus of the analysts tracked by Bloomberg stood at Rs 2,585 crore.

The decline in net profit was despite a healthy growth in non-interest income. Bolstered by treasury gains, this rose nearly 36 percent to Rs 8,424.1 crore. Most banks’ treasuries have benefited in the recent past from declining interest rates.

SBI’s core income, which is its net interest income, however rose only 1.3 percent during the quarter to Rs 14,437.5 crore – a direct consequence of muted loan growth. The bank’s loan book grew 7.2 percent, the slowest in five quarters, and was significantly below the Street’s estimate of 11-12 percent.

Retail loans, of which 60 percent are home loans, remained the bright spot, growing 20.4 percent year on year. A large portion of retail loans, around 70 percent, are still pegged to the base rate, said Deputy Managing Director and Chief Financial Officer Anshula Kant at the bank’s press conference.

These loans are costlier than the ones disbursed since April 1, that is, those that are pegged to the marginal cost of funds lending rate (MCLR). As of now, the bank’s MCLR stands at 8.90 percent, while its base rate is 9.30 percent.

Chairman Arundhati Bhattacharya said most of the bank’s retail loan book would migrate to the MCLR by the end of the financial year once loans get reset.

Asset Quality Worsens

During the quarter, loans worth Rs 11,852 crore became bad loans, marginally higher than that added in the first quarter. Of this, fresh slippages accounted for Rs 10,341 crore.

Of the total additions to the non-performing assets, loans worth Rs 4,853 crore were from the bank’s watch list. Since the RBI’s asset quality review that was aimed at identifying and resolving unrecognised bad loans in the banking system, several banks have identified loans that had a potential to turn bad.

SBI’s watch list at the end of September stood at Rs 25,951 crore. The management anticipates that another Rs 5,000-7,000 crore could slip from the watch list, but this number could reduce if there is more resolution.

Over the past few quarters, the bank has witnessed that 75-80 percent of the slippages are from the watch list and standard restructured book, said Bhattacharya. At the end of the quarter, the bank’s standard restructured book had loans worth Rs 36,570 crore, largely unchanged from the previous quarter.

Provisions grew 21 percent to Rs 7,669.66 crore on a quarter-on-quarter basis, and nearly doubled compared with the same quarter last year.

Demonetisation Has Its Advantages

The withdrawal of Rs 500 and Rs 1,000 notes may be turning out to be a logistical nightmare for banks, but there are advantages too.

The Narendra Modi government on Tuesday announced that the two notes would no longer be legal tender with effect from midnight on Wednesday. The populace was instructed to go to their nearest bank branch to exchange their Rs 500 and Rs 1,000 notes. A consequence of the droves of people going to bank branches is that banks’ deposits are spiking.

On Thursday, the first day that banks were functioning after the move was announced, SBI received deposits worth Rs 22,150 crore across its branches, said Bhattacharya. This number, she said, is not much lower than the deposits collected in a single month.

As a consequence of the spike in deposits, Bhattacharya has revised the bank’s target for deposit growth upwards of 15-15.5 percent for the full year. Loan growth however, is likely to be below what was originally projected.

The bank’s total loan book is likely to grow 10-12 percent in the full year, though it’s more likely to grow at the bottom end of the band, Bhattacharya said.

Segment-Wise Performance

• Profit before interest and taxes of the treasury business rose 81.9 percent to Rs 3,552 crore compared to Rs 1,952 crore in the same quarter last year.
• Corporate/wholesale banking operations registered a net loss of Rs 3,277 crore as against a profit of Rs 683 crore.
• Retail banking business’ PBIT remained largely unchanged at Rs 4,044 crore as against Rs 4,034 crore in the year ago period.

Analysts pointed out that on a consolidated basis the bank bore the brunt of aligning itself with its subsidiaries ahead of their proposed merger. SBI will merge its five associate banks and Bhartiya Mahila Bank with itself, and expects to do so by the end of the financial year.

The bank has largely completed aligning itself with its associate banks, said Bhattacharya. The alignment has been in the form of recognising non-performing assets identified by the asset quality review, making relevant provisions, and optimising treasury operations.