SBI sees brighter days ahead as slippages taper off and merger gains pays off

Generation of new non-performing assets (NPAs) is slowing down for the country's largest banker State Bank of India.

While there would be short-term pain as the banking sector goes for NPA resolution under new guidelines, the effort of the government to ease pains of different sectors would improve the situation through the course of the year to a large extent, helping SBI emerge taller, sharper and healthier in the next financial year.

"Slippages are slowing. Not only RBI, many ministries are working with us to resolve issues relating to individual sectors, like steel ministry, are coming out with a number of things. Similarly, we are talking to power, mining, textile ministries and each of them is putting forth their requirements," SBI chairman Arundhati Bhattacharya said during the earnings press conference.

Net NPA ratio has come down to 3.71%, down both yearly (3.81%) as well as sequentially (4.24%). "We have been able to contain our slippages to Rs 40,000 crore during the year (as against Rs 64,000 crore in FY16)," the CFO said.

There are still stress points in several sectors which might throw up some nasty surprises during the year. "The risks are micro. We are all wary about the telecom sector," she pointed out.

"Due to a number of reasons, including hyper-competitiveness, the sector has come to a point that can be seen as just short of needing a bail-out. Total debt for the sector is at around Rs 4.5 lakh crore, while revenues are around half of this. Despite this, tariffs have been going in the opposite direction of inflation," Rajan S Mathews, director general, Cellular Operators Association of India (COAI) had said, while criticising the levy of 18% GST rate on the sector.

While slippages would largely continue to sober down, there would be pain from NPA resolution during the current year and SBI has asked for relief in terms of spreading out provisioning requirement.

"As per current regulations, all provisioning has to be taken upfront. But we have asked for some dispensation to spread it out to first few quarters. We have already done close to Rs 1700 crores of extra provisioning over and above regulatory requirement and that's why our PCR (provision coverage ratio) has gone to 66% from 62.87% sequentially. We have kept these provisions as we do expect that we need to take some pains as we progress with the resolutions. To that extent, credit costs wouldn't come down. FY19 would definitely be much much better," Bhattacharya said.

On the positive side, SBI would be reaping advantages of scale to be gained from the merger of associate banks during this year.

Higher exposure of the erstwhile five associate banks to retail credit, as opposed to SBI standalone's proportionately higher corporate lending, would help improve margins post-merger made effective in April while the overall credit cost would come down as customers of these banks start getting lesser interest on their deposits.

The cost of the merger, to a large extent, has been taken on the books and this would have a positive impact on margins going forward as the above benefits of the merger start flowing in.

"About 43% of the business of our associate banks was with the corporate while 57% was retail. This is one area of huge strength, which, from now, will be with SBI. With most of the costs associated with the merger took care of, SBI would start reaping the benefit of the merger of the associate banks from the next quarter. SBI would also gain from proportionately higher exposure of the associate banks in retail lending plus repricing of the costlier deposits of the erstwhile associate banks leading to improvement in margins," she said.

But stressed asset monitoring had always been stricter in SBI than its associate banks. "We have decided to take a proper look at the books of our erstwhile associate banks this quarter," she said.