SBI’s strategy shows promise, but no escape from slowdown

State Bank of India’s (SBI’s) strategy over the past three quarters has been to manage bad loans, cut costs and shore up non-interest income. It had declared as much during its December quarter earnings conference. At first look, the bank has so far delivered on its promise, especially when looking at the September quarter numbers. Of course, a sustainable return to growth and a cleaner balance sheet are dependent on the economic recovery.

Thus, the bad loan management has at best meant that it has not let things spiral out of control in the face of prolonged slowdown in growth. Gross non-performing assets (NPAs) as a proportion of advances have stabilized around 4.9% over the last three quarters, compared with 5.73% at the end of December. This bad loan management has been possible owing to both an increase in recoveries and upgrade, and a rise in write-offs. In the September quarter, however, recoveries fell to Rs.965 crore compared with an average Rs.3,287 crore in the past couple of quarters, which underlines the fragility of the incipient economic recovery. There was some improvement in upgrades though, while write-offs also fell to Rs.4,787 crore, against Rs.6,556 crore in the three months to June.

The effect of slow economic growth can be seen on slippages. Fresh additions to bad loans were Rs.7,700 crore in the just ended quarter. While that looks like an improvement over the Rs.9,932 crore slippages in the previous quarter, note that the June numbers were inflated by a nearly Rs.2,000 crore agriculture loan waiver in Telangana and Andhra Pradesh. Slippages were highest in the mid-corporate and small and medium enterprises categories. The former has an NPA ratio as high as 11.15%. So, things haven’t really improved.

To be sure, fresh loan restructurings dropped and the loan recast pipeline has shrunk to Rs.3,000 crore, one-third of what it was nine months ago. Yet, the outlook is not all that bright. SBI chairperson Arundhati Bhattacharya warned that stress won’t go away in this segment for some more time. Most of these companies lack liquidity and are sitting on a pile-up of receivables with stretched working capital cycles. Only a bounce in demand can relieve the pressure on these firms.

SBI’s loan growth, too, was unspectacular in the September quarter at 9.66%, the lowest in at least four years. That and lower margins muted net interest income growth. However, non-interest income grew nearly 40% from a year ago. While a good part of that was from trading income and sale of investments, fee income, too, grew strongly at 19%. This was primarily owing to SBI re-pricing its services. That means this increase will peter out once the base effect is over, unless there is an increase in volumes as well.

The bank also seems to have delivered on its third promise of cutting costs. Operating expenses were just 2% up from a year ago and helped operating profit rise by one-third. An increase in loan provisions pared net profit growth to 30.5%.

While the stock rose 2.6% on Friday, two things warrant investor caution. One, the fact that the economic recovery that is necessary for better asset quality and loan growth is still some time away. Second, the capital that SBI will have to raise to keep up with the new Basel norms.