SBI: Bad loans cast a outline on profit growth

The country’s largest bank, the State Bank of India, reported a robust performance in the quarter to June, beating average earnings estimations of `2,440 crore of various broking houses and the ET Intelligence Group.

The state-owned bank posted a profit of `2,914 crore for the June 2010 quarter, and not surprisingly, its stock rose by 7% at the end of Thursday’s trading session. A note of caution for investors — the robust growth follows after deterioration in asset quality. This could be a major concern that may weigh down its performance in the future.

The bank’s performance was driven by a high net interest income (NII) of `7,303 crore, the highest it has achieved during the last three quarters. NII is the difference between the interest earned and interest expended by the bank. The bank was able to achieve a higher NII even after growing its advances at a shade over 21%, which was in line with the average loan growth in the banking industry.

SBI improved its share of relatively low-cost current and savings account or CASA balances to 47.5% of total deposits. This is the highest among state-owned banks. Among private banks, only HDFC Bank has a higher share of CASA. A higher share of CASA deposits helps a bank in lowering its cost of funds which in turn boosts the net interest margin (NIM) — the difference between the yield on loans or advances and the cost of borrowing. The NIM of the bank was close to 3.2% at the end of the June 2010 quarter. This is the first time the bank has reported a NIM in excess of 3% since the December 2008 quarter.

While the bank fared well on net profit growth and CASA balances, there are areas where it lags behind. For instance, its net non-performing assets (NPA) or bad loans 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 NPA in the first quarter of FY011.

In fact, the bank has averaged a net NPA of 1.7% over the Past seven quarters, an indication 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 a year ago.

For investors, the concern now mainly centres around 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.

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