Q2 Comment. Weak core performance, sharp rise in provisioning impact SBI earnings

The merger with its associate banks that had accentuated the asset quality pain for SBI, appears to have eased, at least optically, in the September quarter. The sharp fall in slippages for the merged entity seem to have enthused the market with the stock rallying post results. While moderation in slippages and increase in provision coverage are positives, muted core performance and continuation of a large bad loan book, are causes for worry. In fact, had it not been for the profit of ₹5,436 crore on sale of its stake in SBI Life in the September quarter, the bank would have reported losses. Given the weak loan growth and rising provisioning requirement, SBI could see more pain in the coming quarters.

The Centre’s mega recap plan for PSU banks could offer some respite. But core performance is expected to remain muted as capital infused will most likely be used to absorb provisioning on bad loans and fund huge haircuts under the NCLT.

Still in the woods Slippages for the merged entity for the September quarter stood at ₹9,026 crore, much lower than the ₹26,249 crore in the June quarter, and ₹25,000-odd crore in the March quarter. While the pace of slippages has moderated, SBI’s huge stockpile of bad loans, remains a cause for worry. The tally of GNPAs for the merged entity at 9.83 per cent of loans, is worrisome considering SBI’s sheer size.

Provisioning requirement is likely to remain elevated. This is because ageing of bad loans (a large book at that) will lead to incrementally higher provisions in the coming quarters. The September quarter results is a case in point.

Loan loss provisioning has gone up from ₹12,125 crore in the June quarter to ₹16,715 in the September quarter despite slippages moderating. There are a couple of reasons for the increase in SBI’s provisioning. One, SBI has made additional provisioning for accounts under the NCLT (both under the first and second lists) to the tune of ₹5,976 crore. Two, SBI has made specific provision on stressed standard assets amounting to ₹2,380 crore. Aside from these, the bank has made some accelerated provisioning on other NPAs. While the incremental provisioning has improved the provision coverage ratio, further rise in provisioning requirement can impact earnings in the coming quarters. In the September quarter, it was thanks to the profit on sale of stake in SBI Life that offered some leeway to undertake higher provisioning.

Weak core performance The possible rise in loan loss provisioning in the coming quarters is of particular concern because of SBI’s weak core performance. The bank’s net interest income grew by a muted 2.5 per cent y-o-y in the September quarter. Gross advances remained more or less flat (1 per cent growth) over the same quarter last year.

Given SBI’s size and reach, its sluggish growth lends little comfort. HDFC Bank has been able to gain nearly 2 percentage points market share in overall bank lending over the past eight quarters or so. SBI has lost about 1.2 percentage point market share in domestic loans over the past year. While SBI’s retail portfolio grew by 13 per cent in the September quarter, its corporate loan (large, medium and SME advances) shrunk by 5.9 per cent y-o-y. Management expects retail to continue to drive growth, and with the outlook on corporate loans still bleak, it has guided for an overall loan growth of just 5-6 per cent in FY18.

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