Moving Right Back On Track

State Bank of India (SBI)
MOVING RIGHT BACK ON TRACK 

 

The country’s largest lender State Bank of India (SBI) posted loss for the December quarter for the first time in nearly 19 years. The bank posted a second consecutive quarterly loss in the March quarter, its highest-ever net loss of Rs77.18 billion. Consequently, the stock has corrected over 15 per cent on a YTD basis which has got the investors of SBI worried. Read on to find out what lies in store for the bank, going forward. 

SBI is the largest state-owned banking and financial services company in India. It is among the oldest commercial bank in the Indian sub-continent. In addition to the banking services, the bank through its subsidiaries provides a range of financial services, which include life insurance, merchant banking, mutual funds, credit card, factoring, security trading, pension fund management and primary dealership in the money market. The bank operates in four business segments, namely, treasury, corporate and wholesale banking, retail banking and other banking business. 

SBI has a vast network of branches in India and overseas, including products aimed at NRIs. The SBI group with about 22,000 branches and over 42 crore customers is probably the only financial institution that reaches every nook and corner of the country. The bank has about 190 overseas offices spread over 36 countries. 

FY18: Dark year for banking industry 

FY18 seems to be the darkest year for the banks as they complete recognition of all the possible toxic assets they hold, primarily due to their own risk management failures. SBI reported a massive quarterly loss of Rs7,718 crore for Q4, wiping out the profits of previous quarters. The Q4 loss is the secondlargest quarterly loss sustained by a bank historically, the highest being suffered by Punjab National Bank. The Reserve Bank of India, in its February circular, forced the banks to recognise stressed assets appropriately and provide for them. As a result, the level of non-performing assets (NPAs) at SBI was impacted. The gross NPA ratio rose to 10.9 per cent from 10.35 per cent in December quarter. In absolute terms, gross NPAs stood at Rs2.23 lakh crore, up from the Rs1.99 lakh crore at the end of December. As bad loans increased, the bank had to set aside a lot more to cover for these delinquencies. Provisions jumped to Rs28,096 crore in the March quarter, ascompared to Rs18,876 crore in the December quarter.

  

The Way Forward: SBI’s Plan FY2020 

The Reserve Bank of India has made sure removal and recognition of bad assets. For FY18, SBI’s slippages were less than the previous year, which means the balance sheet is slowly healing. The SBI management of the bank hopes that with the worst behind them, the next two years will be a slow climb back to normalcy. The management has put numbers to that hope and given guidance on what SBI’s metrics will look like by the end of March 2020. SBI has a given a guidance for loan growth at 12 per cent CAGR, NIM target of 3 per cent, slippages and credit cost of less than 2 per cent, ROA of 0.9-1 per cent. 

The bank is also in the process of revamping its capital markets division. The bank plans to make SBI Capital Markets into a pure play investment bank. SBI is also looking to list its general insurance subsidiary after having listed its life insurance arm last year. To unlock value, SBI Funds and Cards Management is also expected to be listed next year. 

Also, SBI will be the biggest beneficiary of resolution of debt-ridden Bhushan Steel as its bottomline will go up by as much Rs1,300 crore. As a result of the debt resolution, the NPAs or bad loans of SBI will come down by as much as Rs11,000 crore. The bank also received an infusion of Rs8,800 crore from the Government of India as part of the PSU bank recapitalisation programme

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Reorganisation in stressed asset management 

SBI also plans to move stressed asset management to a specialised vertical led by a specially appointed managing director. The bank plans to hire stressed asset specialists for this vertical to help turn around troubled loans faster. This unit will take care of resolution as well as recovery of stressed assets for SBI. With stressed asset management moving to a specialised unit, the bank’s large and mid-corporate banking groups can focus on growing their portfolio. Also, there is plenty of market share up for grabs after the RBI imposed lending restrictions on Dena Bank and Allahabad Bank. Further, other lenders who are under the RBI’s prompt corrective action are also going slow on lending. 

Operational Performance 

SBI reported a decline in its net interest income (NII) on a YoY basis, whereas the loan book saw modest growth. The NII dropped 5.18 per cent to Rs19,974 crore in the March quarter from Rs21,065 crore in the corresponding quarter previous year. SBI provided comparable data for the year ago period by including associate banks and Bharatiya Mahila Bank, which were merged with SBI in April 2017. The decline in its NII can be attributed to the reduction in lending rates and an increase in NPAs.

The bank's domestic advances rose 4.8 per cent. Most of the growth came from lending to the services industry and from retail loans. Home loans grew 13 per cent, while auto loans rose 15 per cent. Advances to large, mid-sized corporates and SMEs also rose 1.8 per cent. 

 

Driven by high provisioning, SBI reported net loss of Rs77 billion during Q4 FY18 as compared to a loss of Rs34 bn during Q4 FY17. At Rs281 bn, provisioning was up 34.2 per cent YoY and 48.8 per cent QoQ, translating into credit cost of 3.8 per cent as compared to 3 per cent for Q4FY17 and 2.6 per cent for Q3FY18. The asset quality saw deterioration with over 60 per cent corporate slippages from the identified stress baggage which stands at Rs258 bn. The power sector, which comprises of 41 per cent of the current watch list, continues to be the major pain point for the bank.

 Subsidiaries post robust growth 

The performance of subsidiaries remained strong in FY18 with PAT for SBI Life coming in at Rs11.5 bn, rising by 20.4 per cent YoY; For SBI Fund management PAT grew to Rs3.3 bn, up 47.8 per cent YoY. SBI General Insurance registered PAT of Rs3.96 bn, up by 159 per cent YoY, whereas SBI Capital Markets reported a 30 per cent YoY increase in PAT to Rs3.3 bn. SBI MF’s market share was 9.4 per cent vis-à-vis 8.6 per cent last year. For SBI General Insurance, the overall market share was at 2.35 per cent against 2.03 per cent last year. 

Conclusion

Structurally, SBI is strongly placed as against its peer PSU banks such as Punjab National Bank, Bank of Baroda, among others, due to its higher CASA ratio; strong branch network and customer base to enable cross-selling, technological advancement; chief market share in digital payments, credit card business, etc; and positive management commentary. We consider that SBI has accounted for its NPAs and stressed assets and the worst days are now over for the bank with likely prospects of recovery. We recommend our readerinvestors to HOLD the stock.