Stock Review: SBI

STATE Bank of India may have beaten average earnings estimates of . 2,578 crore of five broking houses and the ET Intelligence Group, but the latest quarter numbers signal that higher provisions for bad loans could well dent its profitability down the line.

   Over the past seven quarters, the bank's provision coverage ratio has hovered at close to 60%. This is way below that of peers who have reported a provision coverage in excess of 70%, which is the minimum mandated by regulator Reserve Bank of India. Of the total loan loss provisions of . 1,632 crore in the quarter to December, almost a third was utilised to achieve a provision-coverage ratio of 64%. If not for this, profits would have been much higher at . 3,280 crore instead of . 2,828 crore which the bank posted in the December quarter. Clearly, excess provisions are eating into profits.

   There could be further headwinds ahead. State Bank has sought extension of the deadline of September 2011 imposed by the Reserve Bank for achieving a provision coverage of 70%. If this request is declined, it could imply that the bank would have to do provisioning more aggressively — a move which could be a drag on its bottomline over the next few quarters.

   It is not just this that is weighing high on the minds of investors and analysts. The loan-loss provisions don't include the additional provisions mandated by the banking regulator on its fixed-cum-floating loans or what is popularly called teaser loans. The Reserve Bank of India had increased the provisions coverage for loans extended under the dual scheme to 2%, from 0.4%, in December. State Bank has written to the central bank saying that its dual-rate loans don't fall under teaser-loan category. If the case built by the lender is rejected, there could be an additional outgo of . 350 crore, going by the calculations of a few analysts, which could impact its profit.

   There are positives too. One being the expansion of margins. Despite a 50-150 basis point rise in its deposit rates across maturities, State Bank managed to reduce its overall cost of deposits both sequentially and on a YoY basis, thanks to its high share of CASA balances that constituted 48% of its total deposits. Its net interest margin — the difference between the average cost of funds and the yield on loans or advances — rose 79 basis points from a year ago.

   There have been improvements on the assetquality front too. While the past quarter saw fresh slippages or bad-loan additions of . 3,153 crore, the net addition after recoveries, upgradations and write-offs was only . 233 crore. This is much lower than the net adition figures of . 1,290 crore and . 2,380 crore reported in the June and September quarters, respectively. Bad loans formed 1.6% of net advances compared to 1.9% reported a year ago.

   While asset quality is on the mend, what is of concern is the fact that bad loans are still higher compared to its peers. For instance, its closest peer in the PSU banks segment — Punjab National Bank reported a net NPA ratio of only 0.7% in the December quarter.

   It may perhaps be a bit of an unfair comparison given State Bank's size, but investors are bound to be wary on this count for a while.