SBI Q2: Prudent strategy on provision; no negative surprise on asset quality


State Bank of India’s core performance for the second quarter was unimpressive though steady. The highlight was the lack of any negative surprise on asset quality. Proceeds from the stake sale in its arm SBI Life was used to step up provisioning and thus improve the provision coverage ratio.

The bank is now well capitalised and hence the muted growth in the loan book is perhaps a sign of caution rather underperformance. SBI will be one of the biggest beneficiaries of the macro recovery and has an excellent low cost retail deposit base to grow market share at the right time. The stock still looks reasonably valued at 1.7X FY18 adjusted book and deserves accumulation on every decline and is our top pick in the PSU banking space.

Quarter at a glance

The banking bellwether reported after-tax-profit of Rs 1582 crore which optically is a sharp improvement year-on-year from a loss of Rs 558 crore. However, the one-off gains due to the stake sale in SBI Life had a key bearing on the numbers. The bank reportedly garnered Rs 5436 crore out of the same, and adjusting for the same, the growth in operating profit was a muted 11 percent. Net interest income (the difference between interest income and interest expenses) growth stood at a modest 2.6 percent as advances stood flat and margin reported marginal improvement.


The big driver of the number was non-interest earnings, thanks to the proceeds from the stake sale. While core fees grew by 6 percent, the other notable driver was recovery from written-off accounts that surged by over 51 percent.

The cost income ratio also showed a significant decline (thanks to the windfall in other income) but the fine print suggests a reduction in staff expenses as well.

Key takeaways

Windfall goes into provisioning

The number worth noting was 114 percent sequential and 29 percent year-on-year surge in provision that has put the bank again at a comfortable provision coverage ratio. The bank has already taken 75 percent of the required provision for the NCLT II cases as well.


Slippages well contained

After the fiasco on asset quality in the previous quarter, the sequential decline in slippage was heartening.


The total corporate slippage showed a reduction from Rs 8363 crore (Q1 FY18) to Rs 4538 crore and 54 percent of the same was from the watch list. The size of the watch list stands reduced to Rs 21288 crore (Rs 32427 crore in Q4 17 and Rs 24444 crore in Q1 FY18). The total slippage in the first half of FY18 at close to Rs 35,000 crore was, therefore, much less than the year-ago period’s number at Rs 64,719 crore.


Business growth muted but internals improving

The only disappointment was the 0.95 percent growth in advances. In fact, the corporate book has de-grown but retail has grown 13 percent and forms 27 percent of the portfolio. The bank’s share in incremental advances stood at a minuscule 3.4 percent which is much lower than its smaller private sector counterparts.

However, SBI’s share in incremental deposits is a healthy 28 percent. The bank’s total deposits have grown at 10.3 percent while the low-cost CASA (current and savings account) has shown a higher growth of 21 percent. Consequently, the CASA share stands at a healthy 45 percent. While the falling C/D ratio is a matter of concern, we feel a well-capitalised entity like SBI (Tier I Capital Adequacy Ratio of 10.8 percent post the recent capital raise) is well-positioned to participate in the credit market once the recovery starts.

We feel the strength of its liability franchise will stand it in good stead in a highly competitive environment where lending business has moved to MCLR (marginal cost based lending) regime.



NPA resolution – the big event to watch out for

Post recapitalisation, banks will be in a position to take a hair-cut and provisions and that should pave the way for speedier resolution. At the end of this difficult phase, SBI will clearly emerge as a stronger entity amongst its peers and we do not rule out capitalisation of SBI by government especially if some other banking entities were to be taken over by it.

SBI’s relationship with Indian corporates and strength of its liability puts it in a vantage position. While the stock has rallied by close to 30 percent in the past one month, the valuation at 1.7X FY18 adjusted book beckons attention on every decline.