A State Bank of India ATM in Mumbai (File photo)
State Bank of India on August 6 reported a net profit of Rs 6,068 crore for the June quarter, missing the Street estimates by a wide margin as treasury losses eroded profitability.
The average estimates of ten brokerages surveyed by Moneycontrol expected net profit at Rs 7,496 crore, a growth of 16 percent year-on-year (YoY). In contrast, India’s largest lender reported a drop of 6.7 percent in its profit after tax.
SBI has the largest portfolio of fixed income securities of which government securities form a big chunk. The sharp rise in bond yields during the April-June period meant that the lender had to incur huge losses in its trading book.
When bond yields rise, their prices come down. Banks are mandated to mark their investments to prevailing market prices and charge the gains or losses to the profit and loss account, also known as mark-to-market gains or losses.
The mark-to-market hit of Rs 6549 crore dragged SBI’s non-interest income down massively to a mere Rs 2,312 crore from Rs 11,802 crore in the year-ago quarter. This resulted in a fall of 32.8 percent in operating profit to Rs 12,753 crore for the quarter.
Chairman Dinesh Khara said the bank has taken measures to mitigate further losses from an increase in yields. “We now seem fully insulated from rising bond yields,” he said in a virtual press meet.
Beyond the treasury hit, SBI’s core performance was resilient.
Net interest income, the difference between the interest income the bank earns from its lending activities and the interest it paid to depositors, grew by a healthy 12.87 percent to Rs 31,196 crore for the June quarter on the back of a robust 14.9 percent loan growth and stable margins.
Provisions toward bad loans declined, as asset quality improved. Provisions declined 15 percent to Rs 4268 crore for the three months ended June 30, aiding net profit growth.
Balance sheet growth
SBI’s loan book showed a broad-based growth of 14.9 percent, as both corporate and retail loan books grew at a healthy pace.
Most analysts had expected the loan growth to be 14-15 percent for the quarter. Corporate loans grew by 10.57 percent YoY, while the retail book grew faster at 18.58 percent powered by strong growth in home loans.
Net interest margin (NIM) came in at 3.23 percent, an improvement of 8 basis points. One basis point is one-hundredth of a percentage point. That said, NIM was down sequentially.
As SBI’s loans earned it more interest due to lending rate hikes that the bank took during the quarter, growth in its low-cost deposits helped keep the cost of funds low.
Current and savings account deposits grew by 6.5 percent and formed 45.33 percent of the total deposit book. Deposits as a whole grew by 8.73 percent for the quarter.
Asset quality
SBI’s gross bad loans ratio improved from the year-ago period and its already strong provision cushion strengthened further.
The total pile of gross bad loans declined 15 percent from a year ago to Rs 1.13 lakh crore as of June end. Gross bad loans formed 3.91 percent of the loan book as against 5.32 percent in the same quarter of the previous financial year.
On a net basis, non-performing loans formed just 1 percent of the total loan book. Slippages, too, remained contained with the slippage ratio at 1.38 percent, down from 2.47 percent a year ago. Fresh slippages were down 37 percent to Rs 9,740 crore from Rs 15,666 crore a year ago.
That said, asset quality metrics weakened on a sequential basis. The slippage ratio was up 95 basis points from the previous quarter. In fact, June quarter slippages exceeded that of the previous three quarters put together.
Khara said the bank sees no challenges on asset quality, both from corporate and retail loans. Small business loans, though may pose some trouble if the recovery slows. The bank is targeting net bad loans to be 1 percent or less going forward.
The lender, however, won’t shun riskier loans by only underwriting top-rated entities, Khara said. “Our endeavour would be to keep credit costs low but we are very mindful that there is a risk involved and we cannot only underwrite AAA,” he said.
He added that mispricing of risk has come down as liquidity surplus in the banking system was coming down. Following the coronavirus pandemic, SBI warned that a surge in liquidity surplus due to an easy monetary policy could be leading to banks’ mispricing or underpricing riskier loans.
SBI aims to balance incremental risks arising out of lending towards small businesses or lower-rated companies. The bank has got board approval to raise Rs 11,000 crore capital to grow its loan book in FY23.
