More disappointing than the poor profit numbers that SBI reported on Friday—pre-provisioning profits slipped 1.6% yoy—were the woefully inadequate provisions that the bank made for loan losses. Propping up the bottom line—net profits jumped 30% yoy—by not planning for future contingencies doesn’t seem like the right philosophy in the current environment and one expects the top team at SBI to be a lot more circumspect and to not succumb to peer pressure. The SBI management might believe it has its flanks covered—it claims it has up-fronted provisions—but the pace at which the bank is adding toxic assets as also recasting loans suggests the management is being less than prudent. In the three months to September 2012, both gross and net NPAs have gone up by about Rs 2,000 crore each while restructured loans have increased by close to R4,700 crore compared with just R560 crore in the June quarter. Asset quality is clearly slipping; as a share of loans, SBI’s gross NPAs have crossed 5% while net NPAs rose to 2.44%, the second consecutive quarterly rise. Yet the bank has chosen to set aside only R1,837 crore by way of provisions—lower by 34% compared with the June quarter—and its provision coverage ratio is just 63%.
To put it in perspective, peers like HDFC Bank—which has the cleanest book in the business—have a PCR of over 80% for net NPAs of less than 1%. The sharp jump in SBI’s restructured assets is also surprising because the management had indicated in August that the pipeline of assets that could be recast was smaller at around R3,000-4,000 crore and one was under the impression this would happen over the rest of the year. But, clearly, companies are in more trouble than imagined and since the economy isn’t showing signs of an improvement just yet, SBI may want to rethink its provisioning strategy. As for business, the bank may also want to stop chasing volumes by pricing loans too competitively because in the current business environment that might simply result in higher credit costs.
It’s true SBI is sitting on surplus liquidity and it must be tempting to grow the top line but it’s probably better the bank lets go of market share right now in a risky environment. Even if top line growth remains sluggish—net interest income grew an anaemic 5% yoy in the September quarter—the bank would be able to protect its margins which