The drop in the State Bank of Indias (SBI) net interest income (NII) by 3% yoy, in the three months to December 2012, the first such fall in a long time, is an indication of a trying environment in which loan yields are falling and credit costs continue to rise. Even if one adjusts for the loss of interest on the pension funds that have been transferred out to a trust, the increase in the NII is insignificant. With the top line under pressure, the bank was able to grow profits by just 4% yoy to R3,396 crore and that too by compromising on provisioning. SBI provided just R2,766 crore for loan losses, down 8% yoy, which seems somewhat conservative, as does the provision coverage ratio, which dropped to 61.5%, the lowest in five quarters. Its perplexing that SBI doesnt want to provide more aggressively since the banks asset quality continues to deteriorate; in the three months to December, gross non-performing assets (NPAs) rose sequentially to 5.3% from 4.61% a year ago and now amount to a fairly large R53,000 crore. Moreover, there were restructured assets to the tune of R2,838 crore to contend with, and while these may have been lower sequentially, there is little respite from slippagesa high R8,165 crore this time around and in keeping with the run rate clocked in recent quarters. Since it doesnt look like the economy has bottomed out yet, which means its possible more assets could turn toxic or more loans could be recast, one would have expected a lot more caution. Especially since there is likely to be a heavy dose of restructuring next quarter ahead of the tightened provisioning norms starting April 2013.
Meanwhile, business at SBI was fairly brisk during the December quarter and the 25-basis-point cut in base rates last September seems to have paid off, with the bank able to attract more corporate accounts. However, the pressure on yields could persist as loans are re-priced downwards but banks get virtually no relief on the liabilities side since theyre unable to drop interest rates on depositsin SBIs case, for example, interest income grew at half the pace as the interest expenses. Since SBI is flush with funds, it must be tempted to lend the moneyit loaned some R51,000 crore in the December quarter. However, the bank would be forgiven even if it didnt grow the loan book too fast at a time when good credit risk must be hard to come by because investors would prefer that it stayed away from risky lending opportunities than take a hit on account of loan losses. While that cant be good for the banks bottom line, its better banks like SBI keep their powder dry till the economy turns and theyre able to lend to good credit risk.