Net profits at State Bank of India fell 7.8% y-o-y in the three months to March 2014 but the stock jumped to near-9% post the results announcement with the Street comforted by the improvement in asset quality—gross NPAs were lower sequentially, to 4.95% from 5.73% in Q3FY14. Clearly, cleaning up the book is what the bank needs to focus on right now given how NPAs have been piling up and continue to do so. But the enthusiasm seemed somewhat overdone given fresh slippages in Q4FY14, although lower than the R11,433 crore seen in Q3FY14, were a fairly high R7,947 crore.
Also, while the management has put in place a mechanism that will spot trouble quickly and deal with it, it is surprising the provisions for loan losses weren’t higher; at R5,884 crore they may be well above levels seen in earlier quarters but a provision coverage ratio of 62.9% (58.32% in Q3FY14) simply doesn’t seem adequate in the current environment where the stress on the asset portfolio could continue for a couple of years. SBI should consider upping this to 70% because the downturn in the economy isn’t over yet—that’s evident from the sharp jump in restructured assets in Q4FY13 of R7,636 crore, from Rs 3,900 crore in Q3FY14. Moreover, while the share of gross NPAs and restructured loans to total assets may have come down to 8.41% from 9.06% in Q3FY14, it nevertheless remains a very high number. Indeed, credit costs are likely to remain elevated at least for another year. So, SBI might want to be better prepared.
If SBI has managed to show a sharp jump in operating profits, of 37% y-o-y , it’s because the bank has kept a leash on costs—operating expenses have been flat. To be fair though, business has been brisk as seen in the 15.7% y-o-y loan growth in what is not an easy environment. The bank seems to be lending cautiously to the SME segment which continues to see a lot of stress and growing the large corporate book instead. It is also playing to its strengths, reaching out to retail customers—home loans grew 18% last year. Given its brand equity, SBI will have no problem attracting deposits—savings deposits have grown at a remarkable 13% in FY14—and can therefore keep the cost of funds in check. However, other expenses such as wages and salaries could trend up in the future; in