SBI: Counting on better times

In the last one year, while stocks of both public and private banks have rallied on hopes of a revival in investment activity, not much has changed on the ground. On the contrary, the prolonged slowdown has led to credit growth slipping to five-year low of 10.5 per cent as of December 2014. While the slowdown in credit off-take has impacted earnings, the real worry for public sector banks has been the deteriorating asset quality. Bad loans for many have ballooned in the last one year and large additions to the restructured book have further aggravated the problem.

But for State Bank of India, the largest lender in the country, asset quality has remained stable in the past few quarters. This is thanks to the bank’s effort to contain additional slippages. The bank’s asset quality had become a cause for concern in the December 2013 quarter as gross non performing assets (GNPA) shot up to 5.7 per cent and fresh slippages mounted to about ₹11,000 crore.

But since then, over the last four quarters, the bank has been able to bring down its GNPA to 4.9 per cent of loans. Fresh slippages too have been trending lower and stood at ₹7,043 crore in the latest December quarter.

SBI also has the lowest proportion of restructured assets at about 3.6 per cent of loans compared to 6-10 per cent for other PSU banks. Thus, come April, when the existing “regulatory forbearance” on restructuring will no longer be available, SBI will be less impacted than its peers, which will see a notable increase in provisioning requirement.

SBI also remains one of the best capitalised public sector banks with Tier I ratio of 10 per cent. It is one of the nine banks that will receive capital from the Government this year.

In the last one year, the stock of SBI has doubled. But even after the rally, the stock trades at 1.3 times its standalone one-year forward adjusted book value (excluding value of its subsidiaries at ₹60 per share), in line with its historical average of 1.3 times.

Investors with a two-to-three year perspective can buy into the stock.

While containing bad loans is a positive, the bank’s subdued growth in core net interest income has been a concern. The net interest income growth remained muted at 9.2 per cent in the latest December quarter. The pace of growth in core income has slowed since the September quarter when it witnessed 8 per cent growth, after a healthy 15 per cent recorded in the June quarter. The loan growth too moderated to 6.9 per cent in the December quarter (from 9 per cent in the September quarter); lower than the industry growth of about 10 per cent during the same period.

Growth in large corporate loans outpaced that in retail loans. Home and auto loan growth have slowed in the last couple of quarters. In the December quarter, home loans grew by 13 per cent, down from the 18 per cent growth in 2013-14 and auto loans grew by 10.8 per cent (12.6 per cent in 2013-14).

But these concerns should recede, as investment activity picks up over the next year or so. Given the bank’s size and presence across sectors and regions, it offers the best play on the recovery in the economy.

Moreover, SBI has the largest network of branches, with 65 per cent in the rural and semi-urban regions. The bank has the highest share of retail loans in its loan portfolio at about 20 per cent when compared with other public sector banks. SBI’s largest network of branches has helped it maintain a higher share of low-cost retail deposits vis-à-vis its peers. The bank’s CASA ratio stood at 42.5 per cent as of December 2014.

The bank’s net interest margin (NIM) has been stable at about 3.5 per cent in the last two to three quarters. Lack of lending opportunity and ample liquidity made SBIcut deposit rates across various maturities, in a bid to keep margins intact. With lower cost of funds, the bank should be able keep its margins steady in the coming quarters.