Stock Review: State Bank of India (SBI)

 

CHICKENS have come home to roost for India's largest bank, the State Bank of India. The public sector bank, which aggressively grew its books over the last few years, is now in a mood to consolidate its business in FY12. And the process has begun from the fourth quarter of FY11 itself, believe analysts. Like some of its peers in the private sector, SBI may well spend the next financial year consolidating its books. No fireworks this year.

The bank stunned the market on Tuesday with a net profit of `21 crore for the quarter ended March 31. The bank has chosen to take a hit on profit by provisioning for pension and gratuity in one go. Nearly `10,000 crore in pension and gratuity has been provided for in FY11, of which `2,500 crore has been taken from the P&L, while the remaining has come from reserves. Analysts say the bank had the option of staggering this payout over a period of time, but it has chosen to do this upfront so that it's comfortable.

Apart from higher provisioning for employee costs, the bank has also made a `500 crore provisioning for special home loan schemes. The central bank has mandated that banks must make a provision of 2 per cent for standard restructured assets. For the full financial year, the bank's bad loans provisioning stood at `8,792 crore, which includes `2,330 crore additional provisioning for the counter cyclical buffer.

While higher provisioning has come as a shock to the market, analysts claim the pain of higher provisioning is not over yet. An additional pension liability of `2000 crore will be absorbed in the new financial year, which means a quarterly hit of `500 crore. In effect what this means is that profitability will be under pressure.

While higher provisioning has come as a shock to the market, analysts are far more worried about the growth in loans not being reflected in net interest income. Sequentially, loan growth is at 4 per cent but net interest income has dropped 11 per cent. The bank's confidence to improve net interest margins from the existing 3.32 per cent to 3.5 per cent seems far fetched believe analysts in the current environment.

During its after result conference call, the bank tried hard to convince analysts the much required capital infusion would happen through the rights issue. However, the Street remains cautious. The bank will not be able to grow at 20 per cent in FY12 if capital infusion does not happen, claim analysts. In that case the bank will look at growth from secure assets like large AAA rated corporate, which will mean lower margins. Analysts believe there may well be a trade-off between growth and margins.