Mumbai: With most public sector lenders reporting larger losses for the quarter ended March and even private lenders such as ICICI Bank and Axis Bank reporting another quarterly jump in bad loans, the street is awaiting State Bank of India’s (SBI) quarterly numbers with some trepidation. By virtue of the bank’s size, SBI’s numbers are seen as a reflection of the broader economy’s progress and whether companies are able to pay on time. The March quarter earnings will also be seen in the light of the Reserve Bank of India’s (RBI) asset quality review (AQR) that forced banks to recognize a large chunk of their stressed loans and make provisions over two quarters.
These loans emerge from iron and steel, power and other sectors within the broad infrastructure sector that have been facing global headwinds as well as the impact of a domestic economic slowdown. SBI’s exposure to the infrastructure sector is about 17% of its loan book.
To be sure, the bank’s management had indicated a weak fourth quarter when it announced its results for the quarter ended December. Chairman Arundhati Bhattacharya had said that the bank has recognized and provided for 50% of the accounts mentioned by the RBI’s AQR in the third quarter and the rest would be provided in the quarter ended March. The March quarter marks an end to recognition and provision towards stressed loans based on the central bank’s AQR.
SBI is unlikely to report a quarterly loss like its smaller peers, but a Bloomberg survey of 25 analysts showed that the bank’s profit is expected to plummet 39% to Rs.1,886.80 crore for the quarter ended March. The lender’s third quarter results had disappointed the street as its profit after tax dropped a massive 62% to Rs.1,115 crore on the back of a 31% rise in provisioning. What would be crucial are numbers beyond the bottomline. Mint has compiled a list of five things to watch out for when SBI puts out its quarterly performance numbers.
SBI added Rs.20,692 crore to its bad loan stockpile during the three months ended December out of which more than 60% was due to the AQR. The bank’s outstanding gross non-performing assets (GNPAs) stood at a whopping Rs.72,791 crore. Bhattacharya had indicated that slippages would be similar in the fourth quarter as well. According to Bhattacharya, one reason these accounts had to be classified as NPAs was that the loan recovery process takes too long. Based on SBI’s experience, resolution through the debt recovery tribunals (DRTs) sometimes takes as long as 60 months, she said. The resolution mechanism has certainly not improved or hastened since then. Given its large exposure of 17% to infrastructure and restructured loan book of about Rs.48,000 crore, a section of the market fears that the lender may report a larger-than-indicated slippage number for the March quarter.
As of 31 December, total standard restructured loans stood atRs.48,597 crore for SBI under various schemes such as strategic debt restructuring (SDR) and 5/25 scheme. SDR is a process through which banks can take management control of the company defaulting on its loans. However, lenders have to find a buyer within 18 months of invoking the SDR provision. The provision allows banks to categorize the loans as standard. Through the 5/25 scheme, lenders can lengthen the repayment period of loans to 25 years and this was introduced by the RBI mainly to handhold infrastructure projects. Some companies under the SDR scheme are suspected to have been now categorized as bad loans after the RBI’s AQR. The restructuring pipeline of the bank indicates the potential pain points for the coming quarters.
While bad loans have mounted, recoveries have been modest for SBI. The bank’s upgradation and recoveries were a measlyRs.667 crore in the December quarter. To be fair, sluggish economic activity has undermined the bank’s recovery efforts. However, the market will look for indications from the management on how the bank will gear up its recovery mechanism going forward. The bank along with other lenders had come under flak for its inability to recover funds from the defaulting Kingfisher Airlines.
The pile-up of bad loans has limited the risk-taking ability of all lenders and SBI is no exception. While the bank has indicated a loan growth of 12-13% for fiscal 2016, its ability to lend in the current fiscal would be determined by how much stressed assets are added in the March quarter. To be sure, SBI is not hamstrung by capital to lend. But Bhattacharya had indicated that demand for credit from good corporates is lackluster. The bank’s total advances grew 12.88% year-on-year to Rs.14.3 trillion, as of 31 December. A large part of this growth came from SBI’s large corporate loan book, which grew 21% from a year ago. But increased activity in roads, renewable energy, railways and defence could help the bank show a healthy loan growth number.
Progress on the merger of associates
On 17 May, the boards of SBI and all of its associates met individually to initiate talks to merge all the associate banks with the parent. The move will create a Rs.37 trillion banking behemoth. While the progress on the merger process will have no impact in the short term on the books of the bank, it would give an indication of how robust its balance sheet will be. Comments from the management on the asset quality of associates and the likely handling of potential slippages from their books would be closely watched for. Given that some of its associates have weaker balance sheets, taking on their GNPAs could undermine SBI’s capital position to some extent.