SBI’s financials improve, but mirror weakness in economy

How the country’s largest lender performs speaks volumes about the health of the overall economy. To that effect, State Bank of India (SBI’s) second quarter results had some good news and a lot of bad omens.

The banking behemoth reported a welcome drop in its bad loan ratios and a sharp fall in fresh slippages sequentially, which suggests the economy is on the mend, with corporate deleveraging under way. SBI’s gross non-performing assets (NPAs) slipped to 9.83% for the second quarter from 9.97% in the previous quarter.

More importantly, fresh slippages fell to Rs9,026 crore from a massive Rs26,249 crore in the previous quarter. Recall that the bank merged its five associates effective 1 April and the previous quarter’s results bore the brunt of the mergers.

Much of the overhang on asset quality in the first quarter was due to the ingestion of the associates. Nevertheless, SBI has adhered to the guidance it gave on slippages last quarter and shown stellar performance this time around. The Street rewarded this by driving up the stock 6%.

Leaving out the exceptional gain from the stake sale in SBI Life Insurance Co. Ltd, the lender’s operating profit growth of 11% is nothing to sneeze at. While the management didn’t give a clear outlook on slippages in the coming quarters, it sounded sanguine on asset quality. Much of the cheer comes from its own readiness through higher provisioning. SBI used its exceptional gains prudently to raise provisions by 27%.

The fact that it has provided more than 50% for all the stressed accounts including those referred for bankruptcy proceedings under the Insolvency and Bankruptcy Code indicates it is adequately covered in case of higher haircuts.

As for the economy though, there are enough distressing signs that show health is yet to be fully restored. Upgrades and recoveries were half what they were in the previous quarter. What should cause heartburn is that write-offs exceeded recoveries and up­grades by a huge margin yet again. During the quarter, SBI transferred Rs9,258 crore to advances under collection account—in other words, write-offs. The management was not too optimistic on the resolution of the stressed accounts.

Perhaps most importantly from the point of view of the economy, SBI’s loan book barely expanded in the second quarter and its corporate loan book shrank 6%. Retail loans continued to drive growth but the slowdown is apparent here too. For instance, home loan growth, the anchor in the retail book, has slowed to 12% from an average of 14% in the previous quarters. Indeed, gains made from the sale of investments fuelled the increase in operating profits. The lender estimates loan growth to be 5-6% for the current fiscal year, a far cry from the double-digit growth of the previous years.

To be sure, chairman Rajnish Kumar said SBI is not chasing credit growth but rather return on assets (RoA). That is a first for a public sector lender, historically driven by balance-sheet expansion targets. Nonetheless, loan growth is essential for a decent RoA.

SBI’s credit-deposit ratio is 65% and it is ready to lend. The problem, however, seems to be that hardly any corporate entity is ready to borrow.