Bad loans back to bite SBI

Livemint :Ravikrishnan:Sat, Aug 11 2012. 12:26 AM IST

State Bank of India’s (SBI’s) 137% increase in net profit for the June quarter from a year ago fails to mask the problems it is facing. Stressed loans are piling up for the bank even as it is slowing down on the operational side.

The June quarter numbers show that the good performance for the three months ended March may have been a temporary blip. In the June quarter, fresh slippages into bad loans totalled some Rs.10,844 crore, nearly double what the bank had guided for.

Adjusting for upgrades, SBI added Rs.7,480 crore to its gross non-performing assets (NPAs). That compares with a Rs.421 crore drop in March and Rs.6,000 crore-odd additions in the previous couple of quarters.

That means the bank’s gross NPAs, as a proportion of its total loan book, are 4.99%, the highest in at least eight quarters. On the brighter side, SBI recast loans worth only Rs.564 crore in the June quarter, about one-tenth of what it had in the three months ended March. But then look at the overall stressed asset position (i.e., gross NPAs plus recast loans). The June numbers are 60% more than those of March, reflecting continued pressures.

The bank seems to think that the bad loans situation should ease soon. Its loan loss provisions for June are the same as a year ago, when asset quality was far more robust. In effect, it has sacrificed provision cover to boost its net profit numbers.

Perhaps it didn’t have much choice. Operationally, the numbers are reflecting a slowdown from the March quarter. Net interest income grew 14.63% from a year ago in the June quarter against 43.84% in March. This is the slowest in at least eight quarters. Non-interest income shrank 1% in June compared with an 11.66% increase in March. Within this category, too, fee income grew a measly 1.2% year-on-year in the June quarter from 13.5% in March. The net result was that operating profit growth slowed down to 12.9% in June, way below the 57.85% in the fourth quarter of last fiscal.

Even the industry-beating 20% increase in SBI’s loan book from a year ago has come at a cost. The bank’s yield on advances declined 19 basis points sequentially, while its cost of deposits rose 29 basis points. As a result, net interest margin fell to 3.57% in June, down 18 basis points from a quarter ago. A basis point is 0.01%.

Also note that the fastest growing category in the loan book was farm debt, which grew 25.85% from a year ago. This is also a category that is seeing a fair amount of slippages, especially with a drought looming.

The outlook for SBI is sombre. With economic indicators showing that the economic downturn has not bottomed out, it is hard to see how India’s largest bank will fare any better.