The fall in State Bank of India’s bottom line in Q4 FY13 of 18% year-on-year to R3,299 crore would have been even steeper at 44% had it not been the much smaller outgo on taxes this time around of just R280 crore, so it’s no surprise the stock tanked 7.85% on Thursday. There are multiple pressure points that India’s largest bank continues to face. To begin with, the top line has slipped more than expected—the net interest income came off by 4.4% to R11,078 crore—that’s the fallout of an economy that’s still decelerating. What SBI should have done, but didn’t, is to provide more for potential loan losses and restructured assets—the bank has consistently under-provided for these in recent quarters. In Q4 FY13, provisions have increased significantly to R3,974 crore from R2,766 crore in Q3 FY13 and R2,837 crore in Q4 FY12. It would be imprudent for SBI to believe the pain of restructuring is over. While asset quality may have improved in Q4 FY13—both gross and net non-performing assets are down sequentially to 4.75% and 2.10%, respectively—the jump in the quantum of restructuring at R8,669 crore from R2,838 crore in Q3 FY13 is disconcerting. Moreover, fresh slippages at R5,688 crore remain high and are a sign that the worst may not be over. Given how over-leveraged infrastructure companies are and how crimped their cash flows are, recasts in the nature of Reliance Power’s Sasan unit—where SBI has restructured a borrowing of R1,000-crore plus—could be a recurring feature of the bank’s results for some more quarters.
Apart from upping provisions, SBI’s main task in the months ahead will be to try and rein in the NPAs while simultaneously recouping as much of the loan losses as possible. Growing the top line will continue to be a challenge for SBI as also other public sector banks—credit offtake could at best be higher by 15% in FY14. Since corporates aren’t really investing, whether in brownfield or greenfield ventures, it doesn’t look like there will be too many opportunities for project financing, which, for a large bank like SBI, could be a problem. With little room to lend to SMEs, the best that SBI can do until the project pipeline starts filling up is to maintain its share of the working capital loans space—where again the industry growth will be in line with top line growth for India Inc of 8-9%—while trying to grow its retail book. Indeed, there’s no hurry to add assets or grow the loan book aggressively; there will be scope to do that as and when the revival is stronger. SBI would do well to keep its powder dry; a small sacrifice in net in margins in the near term might well save it a lot on credit costs in the long run.