State Bank of India’s (SBI’s) July-September 2018 quarter (second quarter, or Q2) results were not only better than expected, but also suggest that major problems pertaining to asset quality or non-performing loans (NPAs) are behind. This also helped improve investors’ confidence in other public sector banks, which have been facing asset quality and growth issues. With this, analysts believe the major pain is behind for SBI. This could lead to more gains for the stock.
Not surprising then, SBI and the Nifty PSU Bank index ended with 3.4 per cent and 2.9 per cent gains on Monday, against 0.27 per cent decline in Nifty50.
The key highlight in SBI’s Q2 is the sequential improvement in asset quality, led by lower slippages (accounts turning bad), which declined 24 per cent. Importantly, 75 per cent of corporate slippages of Rs 31.9 billion were from the watch list (known loan accounts with potential to default), indicating new bad loans were restricted.
With this, watch list, as a percentage of total advances, fell to 1 per cent, from 1.12 per cent a quarter ago. Gross NPA ratio improved to 9.95 per cent, from 10.7 per cent in first quarter (Q1) of 2018-19 (FY19). The management also sounded confident about controlling NPAs.
Yes, selling part stake in SBI General Insurance and transfer of merchant acquiring business (exceptional income of Rs 15.6 billion) helped SBI post a net profit of Rs 9.4 billion in Q2, but Q2 of last year also included a higher amount of Rs 54.36 billion earned from stake sale in SBI Life allowing the bank to post a profit of Rs 15.8 billion. Nonetheless, the net profit for the latest quarter was ahead of the Rs 6.3 billion estimated by analysts.
Even as higher expenses weighed on operating performance, a 12.5-per cent year-on-year (YoY) rise in net interest income to Rs 209.1 billion, led by 9.3 per cent rise in advances to Rs 20.7 trillion, are signs of recovery.
Interestingly, SBI’s corporate loan book surged 14.3 per cent YoY. Net interest margin, too, improved 29 basis points YoY to 2.88 per cent, despite no large resolution under the National Company Law Tribunal as observed in Q1FY19.
“Good advances growth, improvement in asset quality (with lower slippages), and provision coverage ratio to a healthy 70.7 per cent are positives. Though provisions and slippages may remain elevated, but should be following a decreasing trend since major NPA recognition cycle has peaked,” says Lalitabh Srivastava, AVP at Sharekhan, who believes the risk-reward is in favour of SBI.