State Bank Of India’s Profit Doubles In Q3; Asset Quality Stable

State Bank of India (SBI) posted its first profit growth after four quarters. India’s largest public sector lender reported a 134 percent jump in net profit during the October-December quarter, largely aided by the 3.9 percent stake sale in its subsidiary, SBI Life Insurance for Rs 1,755 crore.

Net profit rose to Rs 2,610 crore from Rs 1,115 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 2,509.7 crore.

Income accrued through the SBI Life stake sale will be used towards loan provisioning, SBI Chairman Arundhati Bhattacharya said in the analyst conference call.

Net Interest Income for the bank grew 2.2 percent during the quarter to Rs 14,751.5 crore compared to Rs 14,437.5 crore in the previous quarter. Analysts had projected the figure at Rs 14,513.7 crore.

Deposits rose 22.1 percent, year-on-year as the government’s demonetisation drive forced customers to deposit old Rs 500 and Rs 1,000 currency notes in their bank accounts.

Asset Quality Performance

Gross non-performing assets for the bank in absolute terms stood at Rs 1,08,172 crore compared to Rs 1,05,873 crore during the July-September quarter. Percentage of gross non-performing assets in the third quarter stood at 7.23 percent as compared to 7.14 percent in the previous quarter. Net non-performing assets came in at 4.24 percent as against 4.19 percent sequentially.

“Our outlook on asset quality was Rs 40,000 crore (net NPAs) for this year. I don’t see this number coming down this year. But because the topline growth has been weak this quarter, the asset quality didn’t decline much,” Chairman Arundhati Bhattacharya said in the media briefing after the earnings announcement.

Provisions for non-performing assets declined 5.5 percent sequentially to Rs 7,244.6 crore compared to Rs 7,669.7 crore in the previous quarter.

The bank invoked the Strategic Debt Restructuring scheme (SDR) and S4A scheme for 25 accounts amounting to a sum of Rs 16,427 crore as of December 31, 2016, according to the the bank’s media statement.

Provision coverage ratio as of December 31, 2016 improved 70 basis points sequentially at 62.87 percent.

SBI also made use of the RBI’s NPA recognition dispensation scheme – impact of this on quantum of NPA is Rs 2,002 crore.

The bank had fresh slippages worth Rs 10,185 crore, which Bhattacharya said was well within the guidance. She added that 73 percent of the slippages were from the watchlist.

"The fresh slippages are very much within the guidance that had been given by us. We have guided for above Rs 40,000 crore of fresh slippages for this financial year, of which we have Rs 29,316 crore in the three quarters," Bhattacharya said.

When asked about the outlook on resolution of stressed loan in the fourth quarter, she said, "We were very hopeful that things would start moving in this quarter. The demonetisation has actually put us back by a quarter.

The bank revised its loan growth target, which was set at 11-12 percent in the beginning of the year, to 6.5 per cent.

"In the financial year 2016-17, the credit growth will be restricted to around 6.5 percent and in the next financial year we expect to grow at 11 percent," Bhattacharya said.

Here are more highlights from SBI’s analyst conference call:

On SBI-Brookfield Stressed Asset Fund

State Bank of India had signed a memorandum of understanding (MoU) to collaborate with Brookfield Asset Management in July last year for setting up a stressed asset fund. Bhattacharya, said that the bank and the Canadian company had not reached the concluding stage for any deals. The bank is evaluating proposals and maybe able to close two deals next year, she added.

On Bad Bank

On the widely discussed concept of a bad bank, she said that the government hadn't approached them for any discussion.

On Transmission Of Rate Cuts

Bhattacharya said that SBI was ahead of the Reserve Bank of India to cut lending rates. SBI's marginal cost of lending rate has been cut by 200 basis points since 2015 compared to 175 basis points cut by the central bank. She added that the bank is not anticipating any more lending rate cuts in the near-term.

Demonetisation Impact

The chairman said that demand pickup could've been derailed due to the demonetisation move. The impact of the note ban wasn't seen much on the mid-corporate category (which avail credit between Rs 50 crore and Rs 500 crore), according to Bhattacharya. However, industries where labour participation was high like textiles, gems and jewellery and ship-breaking witnessed a slowdown in demand, she added. In fact she said there wasn’t much working capital enhancement demand even in the existing loans and working capital requirements haven’t risen much given the capex slowdown.

Bhattacharya also added that the lender's credit growth will be limited to 6.5 percent this year and may pick up to 11 percent in FY18.

Non-Core Assets Stake Sale

On SBI Life Insurance Company Limited’s IPO, Bhattacharya said futher developments would come in post consultation with the Board. In case of SBI Cards, she stated that most of the negotiations were over and nearing an end. While on the general insurance business front, a valuer had been appointed.

Bond Yields Trend Reversal

Bhattacharya said she does not see any deep impact in Q4FY17 from G-Sec yield movement. Yields on the ten-year bonds spiked by 30 basis points, the biggest jump in over two years as the Reserve Bank of India left the repo rate unchanged against a widely expected cut. A fall in bond prices could hurt treasury incomes of banks.

However, the net interest margin may come down by 5-6 basis points at most in Q4FY18, she warned.

The bank’s capital adequacy ratio in the third quarter stood at 13.73 percent, higher than the minimum CAR requirement of 10.25 percent at the end of the current fiscal under Basel III norms. Even with the approved merger of SBI with its associates, the CAR will remain at 13.12 percent, Bhattacharya said in the analyst conference call.