Stock Review: State Bank Of India (SBI)

THE country's largest public sector bank, State Bank of India, reported robust performance in the first quarter of FY11, beating average earnings estimations of Rs 2,440 crore of various broking houses. The bank posted a profit of Rs 2,914 crore for the June 2010 quarter, and not surprisingly, its stock rose by 7% at the end of the Thursday's trading session. While the bank reported robust growth of 25% in net profit, its asset quality deteriorated. This could be a major concern for investors, going ahead. The bank's performance was driven by a high net interest income (NII) of Rs 7,303 crore, the highest it has achieved in the past three quarters. NII is the difference between interest earned and interest expended by the bank. The bank was able to achieve a higher NII even after growing its advances at just over 21%, which was in line with the average credit growth in the banking industry.

   The bank improved its share of current and savings account (CASA) balances to 47.5% of total deposits. This is the highest among public sector banks. In the private sector, only HDFC Bank has a higher share of CASA than this. A higher share of CASA deposits helps a bank in lowering its cost of funds. This boosts the net interest margin (NIM), which is the spread between the yield on advances and costs of borrowing. NIMs of the bank stood at around 3.2% at the end of the June 2010 quarter. This is the first time the bank's reported NIM in excess of 3% since the December 2008 quarter.

   While SBI fared well on net profit growth and CASA balances, certain factors had a lagging impact. For instance, its net non-performing assets (NPAs), at 1.7% of net advances, are one of the highest among large sized local banks. Its peers Punjab National Bank and Bank of Baroda averaged 0.6% net NPAs in the first quarter of FY11. In fact, the bank has averaged 1.7% net NPA in the past seven quarters. This shows that the bank's asset quality has not improved much. A deteriorating asset quality has led to a 29% jump in loan loss provisions in the June 2010 quarter from the year-ago period.

   For investors, the concern now mainly centers on bad loans. A better asset quality will lead to lower provisions for bad loans. This, in turn, will allow the bank to grow its net profit at a higher rate.