For every Rs 1 SBI lent in Q3, 72p of old loans went bad
Going by the lukewarm response to its recent equity issue, it’s almost as if investors had a premonition State Bank of India’s (SBI) problems were far bigger than they seemed; the bank’s placement of shares to institutional investors, which opened late in January, turned out to be a resounding flop requiring the resources of the state insurer to be rustled up to save it a few blushes. The results for the December, 2013 quarter suggest the bank’s troubles are far from over with deteriorating asset quality weighing heavily on the P&L. Indeed, for every one rupee that the bank lent in the home market during the quarter, 72 paise lent in the past went bad. Fresh slippages totalled a staggering R11,438 crore, a shock given it came on the back of an unusually large R8,365 crore slippage in the September quarter. The slippages together with the sharp increase in the restructured portfolio of around R6,000 crore overshadowed the fact that net profits fell for the fourth straight quarter.
While most public sector banks have fared poorly over the past year or so, thanks to a rise in the quantum of restructured loans and non-performing assets (NPAs)—some of it the result of a sluggish economy and some the result of reckless lending—SBI was believed to have been on a somewhat better wicket. The fact that the bank’s provision coverage ratio (PCR) has consistently been lower than that for its peers was taken to mean that it had a grip on asset quality. However, it turns out the lender is in trouble too which is why although the management indicated on Friday that the worst wasn’t over, the PCR fell inexplicably to 58.32% from 61% at the end of the September quarter. Given that chairperson Arundhati Bhattacharya acknowledged that the bank had not ‘cleaned up its books regularly’ in the past, a practice that resulted in a huge R5,000 crore write-off in the
December quarter, one would have expected more provisioning for loan losses—the amount of R3,429 crore provided doesn’t seem like it will be enough to take care of future loan losses.
While there is little point crying over spilt milk, the bank clearly needs to put in place far more robust and rigorous appraisal processes and while these cannot be effected immediately, the top brass needs to be more vigilant than ever about new loans. Given that it has a strong CASA franchise—44%—SBI will never be short of money to lend but it simply cannot afford a repeat performance of the last few years. Fortunately the bank’s Tier I capital will go up to 10.2% after the R10,000 crore that it mopped up from the government and institutional investors and is more comfortable on this front than other PSUs. There is a lesson in that investors chose not to buy the SBI stock even though it was trading at very low multiples—0.85 times trailing price to book. On Friday, the scrip tanked to a near-five year low, valuing the stock at its lowest since June, 2004. That's a wake up call if ever there was one.