SBI’s Q3 profit gets a steely upgrade but loan growth spells trouble

State Bank of India

December quarter was by far the best in terms of net profit for India’s largest lender State Bank of India (SBI). The over 2% rise in the stock price shows that the market has taken note of it.

The large contributor to this was the ?11,000 crore recovery from a single account, Essar Steel. This single cheque not only boosted SBI’s recoveries by a massive 51% but also added heft to its core income growth. SBI reported a net interest income growth of 22% for the December quarter.

Logically, bad loan ratios improved too since recoveries and upgrades increased. Gross bad loan ratio dropped to 6.94% from 7.53% a year ago, overshadowing the fact that SBI had under reported the extent of bad loans in its books for FY19.

To be fair, the bad loan divergence was already known as the lender had informed the markets in December about the same. SBI’s chairman Rajnish Kumar had said that these divergences have been provided for in subsequent quarters. In other words, investors need not brace for nasty surprises.

Investors have good reason to trust SBI. The lender’s provision coverage ratio is over 81.7%, one of the highest in the industry.

But in a slowing economy, there is always trouble. While steel may have been the boon for SBI, housing became the bane. Its exposure to Dewan Housing FInance Ltd. sucked up the benefits from the steel account recovery. With DHFL labeled as bad in the December quarter slippages rose to ?16,525 crore, more than double from the previous quarter.

Also, loan growth was dismal at less than 6% and that has made Kumar cut his expectations on the full year growth of 10%. “I think 10-12% target which we had in mind is not difficult,” he said in a media conference call.

But the management commentary on slippages in the coming quarter was sanguine and should please investors. Kumar said that in the current quarter, slippages should not exceed ?5,000-6,000 crore. Ergo, the need for provisions would reduce, he added.

To be sure, SBI’s SMA (special mention accounts) that are an early warning sign of trouble, are low. After DHFL turned bad, the SMA book has reduced by 57%. Kumar indicated that no fresh signs of stress have emerged since then.

All signs now point to a fast healing and energised SBI. But is the economy willing to borrow? The answer to this would determine how fast SBI grows in the coming quarters.

News Source:- Livemint

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