At first glance, SBI reporting a profit in the latest June quarter against a substantial loss last year, along with a marginal dip in bad loans and lower provisioning, may enthuse investors.

But the fact that the fall in bad loans has been due to substantial write-offs, offsetting the significant rise in slippages in the quarter, offers little comfort.

Bad loan provisions though down sequentially and year-on-year, remain elevated at ₹11,600-odd crore. SBI’s special mention (SM) accounts book has also inched up in the June quarter, indicating persistant stress.

After steep slippages of ₹33,670 crore in the March 2018 quarter, when the RBI’s earlier circular on stressed assets accelerated NPA recognition, slippages moderated in FY19, from about ₹10,000-crore quarterly in the first half to ₹4,000-7,000 crore in the second half.

In the latest June quarter, SBI has added ₹16,212 crore to its bad loans, hardly comforting for a bank already sitting on a bad loan book of over ₹1.6-lakh crore.

Also, after the one-off recovery in the June quarter last year, recoveries have not been significant. Much of the reduction in bad loans has come from write-offs in the past few quarters. In the June quarter too, write-offs stood at a substantial ₹15,400 crore (reduction in bad loans, less recovery). Write-offs mean that banks fully provide for bad loans (taking a knock on profits) and take them off the books. Recovery rate from such accounts in the past has been very poor.

SBI’s SMA1 (where payments are overdue by 31-60 days) and SMA2 (overdue by 61-90 days) book increased to ₹10,289 crore in the latest quarter, from ₹7762 crore in the March quarter. This includes ₹2,014 crore pertaining to a state government entity.

Also, post RBI’s June circular (revised framework for resolution of stressed accounts), in the event of a default, banks have to decide on the resolution plan, which requires all lenders to enter into an inter-creditor agreement (ICA); in 20 standard accounts of SBI, the ICA has been signed or likely to be signed. These accounts amount to ₹19,142 crore and carry about 15 per cent provision.

A substantial stressed assets pool leaves open the possibility of large slippages. Quick resolution of large accounts under the IBC will be critical to drive earnings in the coming quarters.

Core performance

SBI’s domestic loan growth of 12 per cent in the June quarter is led by retail loan growth of 18.6 per cent. Agri and SME growth were modest at 6.8 per cent and 2 per cent respectively; corporate loan growth stood at 11.6 per cent.

SBI’s loan growth lags that of leading private sector banks that have managed to grow their loan books by 17-19 per cent in the June quarter. The muted 5 per cent growth in net interest income was due to a one-off recovery of ₹1,900 crore in the same quarter last year; excluding this, net interest income grew by 15 per cent.

While the recent sharp cut in deposit rates should aid net interest margin in the coming quarter, SBI’s modest deposit growth is a concern. Total deposits and term deposits grew by a modest 7 per cent. This is a far cry from the robust 20-30 per cent growth in term deposits of leading private sector banks. The sharp deposit rate cut by SBI can impact deposit growth further.

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