SBI: Asset quality continues to slip

Even as the profit growth of State Bank of India (SBI) beat street estimates, asset quality worries continued to exert pressure on the bank's operating performance. In spite of showing a 12.3 per cent year-on-year growth in September quarter's net profit, higher slippages in non-performing assets (NPA) led to the SBI stock losing 6.76 per cent in Wednesday's trade.

NPA woes continue

SBI's gross NPA grew 22 per cent between June 2011 and September 2011 as against 19 per cent by other public sector banks (PSBs). This even as SBI already has higher levels of stressed assets.

Slippages have been witnessed predominantly in the agriculture, corporate (export oriented, iron and steel and hospitality segments) and SME portfolios.

Adding to concerns were slippages on assets already restructured earlier which contributed to 29 per cent of the net slippages between June and September. Consequently, SBI's gross NPA ratio rose from 3.28 per cent as of March 2011 to 4.19 per cent during the September 2011 quarter.

Markets also seem concerned about expected moderation in economic growth exerting further pressure on the asset quality of banks, including SBI.

Core operations improve

The asset quality slippages overshadowed what was otherwise an encouraging performance as the bank increased its focus on profitability rather than volumes. While this led to loss of market share in loans, the bank's net interest income growth during the September quarter was at an impressive 28.6 per cent year-on-year compared to the 11 per cent registered by other PSBs and 18 per cent by private banks.

SBI's net interest margin (NIM) improved from 3.43 per cent in the September 2010 quarter to 3.8 per cent in the latest reported quarter. The improvement in NIM is far better than that of other PSBs, thanks to re-pricing of high cost deposits raised in 2008 and retirement of bulk deposits.

The significant proportion (47.6 per cent) of low-cost deposits also aided margins. Additionally, much of the hike in the bank's lending rates have been effected during the first half of this fiscal. Consequently, margins have also improved over the last two quarters. With the latest base rate hike coming in the second half of the September quarter, benefits should be fully reflected in the December quarter.

One more positive aspect of September quarter results was, despite the rise in NPAs, the bank managed to limit the rise of restructured assets (4.36 per cent of the total advances) which is among the lowest in the public sector bank space.