Bad loans & bond yields cut SBI Q1 net by 13.6%

Written by fe Bureau | Mumbai | Updated: Aug 13 2013, 05:30am hrs
State Bank of India (SBI) on Monday reported a fall in standalone profit for the three months to June 2013 against the backdrop of a weak economy, even as its asset quality deteriorated. The countrys largest lender also took a mark-to-market hit on its international investment portfolio on account of the rise in global bond yields.

SBIs net profit fell 13.6% year-on-year to R3,241 crore on the back of a drop in the operating profit of 7.65% y-o-y to R7,551 crore. The banks net interest income rose a modest 3.5% y-o-y to R11,512 crore, while the net interest margin (NIM) for the domestic business dropped to 3.44% from 3.66% at the end of the March 2013 quarter. The SBI stock fell to R1,604.80 on the BSE, down 3.41% from its previous close.

The bank continued to grapple with asset quality concerns, reporting fresh slippages of R13,766 crore in the first quarter. Gross non-performing assets (NPAs) were higher at 5.56%, up 81 basis points over the January-March quarter, while net NPAs rose to 2.83%, up 73 basis points sequentially.

Slippages have been the highest in the SME and agriculture segments, which has come as a surprise, said SBI chairman Pratip Chaudhuri.

Slippages in the SME segment were as high as Rs 3,925 crore while those in the agriculture segment stood at Rs 3,245 crore. The bank, however, does not believe agriculture NPAs will spiral higher since the better-than-expected monsoon is expected to help keep rural incomes steady.

Despite the rise in NPAs, provisions for bad loans during the quarter were lower at Rs 2,265 crore, compared with Rs 3,974 crore in the previous quarter; NPAs in the agriculture segment required lower provisioning given the loans were backed by land assets, Chaudhuri explained.

The quantum of restructuring also remained high, with fresh restructured accounts adding up to Rs 5,000 crore, taking the banks total restructured book to Rs 57,698 crore.

The pipeline for restructuring is about Rs 10,000 crore but that does not necessarily mean it will all show up in the second quarter,Soundara Kumar, deputy managing director in-charge of stressed assets said. Sectors like iron and steel, roads and power were major contributors to the restructured accounts, Kumar confirmed.

Cumulatively, eight large banks including SBI are now sitting on a pipeline of restructured assets worth over Rs 25,000 crore, suggesting that asset quality pressures in the industry are far from over.

The bank also took a mark-to-market hit of Rs 575 crore on its international investment book due to a sudden rise in global yields after the US Federal Reserve announced its intention to taper its quantitative easing programme. While the bank expects this to be a one-time hit, a hedging strategy is being put in place in the event of another sharp move in yields.

Going forward, we will work on a strategy that mitigates the risk of an adverse move in bond prices by hedging, but at the same time making sure we get a decent return on the portfolio, said Hemant Contractor, MD, SBI.

Operationally, SBI continued to show steady growth with deposits and advances growing ahead of industry averages. Gross advances grew 15.79% y-o-y in Q1FY14 to Rs 10,95,145 crore while deposits grew 14% y-o-y to Rs 12,57,389 crore. Current account savings account (CASA) ratio for the bank contracted to 44.67%, as compared with 46.14% in the same quarter last year.

SBI is sitting on nearly Rs 60,000-70,000 crore in excess liquidity, which will allow it to continue growing its advances book in an otherwise tight liquidity environment.

We are seeing strong growth in home loans and refinancing of existing loans. We are possibly enjoying a virtual monopoly in refinancing given the kind of cash that we are sitting on, said Chaudhuri.

The bank, however, remains cautious in deploying its liquidity with the management suggesting that only refinancing requests from top-rated corporates are being entertained. This has had a marginal negative impact on the bank's yield on advances, which has moved lower to 10.05% at the end of the June 2013 quarter from 10.86% at the of the June 2012 quarter.

State Bank of India currently has an available-for-sale (AFS) bond portfolio of Rs 1,60,000 crore and a hold-to-maturity (HTM) portfolio of Rs 2,33,000 crore. Like most other lenders, SBI could take a hit on treasury operations if the domestic bond yield remains high due to the RBI's liquidity tightening measures. At the current level of yields, SBI would take a mark-to-market hit of Rs 1,500 crore on its treasury portfolio, the SBI chairman said. The mark-to-market position is calculated based on closing yields on the last trading day of each quarter.