SBI’s core business stays strong despite one-time hit on account of higher wage costs in Q3

• SBI’s Q3 income and profit were hit by heightened wage costs, which is expected to normalize in FY25.
• Its improving asset quality, lower credit costs and drop in NPAs have impressed the street.
• Analysts believe that its deposit situation is ‘comfortable’ giving it enough headroom to cushion loan growth.
  

India’s largest bank SBI saw its third quarter profits slip by 35.5% as it took a ₹7,100 exceptional charge. It provided for pension and gratuity liabilities as it reached an agreement with the unions for a 17% wage hike last November. These costs might flow into Q4 as well with a normalization expected only in FY25. Yet, the street is impressed with its asset quality improvement and business outlook.

“The quarter had fewer pressure points on slippages (0.6%), credit costs (0.1%) and asset quality metrics. Loan growth is healthy at 15% YoY and the bank is comfortable with the deposit situation unlike most private banks,” said Kotak Institutional Equities.

Its continued recoveries and write-offs led to a 13 basis point sequential drop in the gross non-performing asset (GNPA) ratio to 2.42%. The net non-performing asset (NNPA) ratio remained flat at 0.64%. Its restructured book declined to ₹18,900 crore to 0.5% of advances, while special mention accounts (SMA) 1/2 portfolio stood at ₹4,130 crore which is 12 basis point of loans.

“Asset quality continues to be in pristine form. Overall performance was healthy and the bank continues to gain from the low credit cost cycle, which can continue for some time and is difficult to precisely time the normalization,” said a report by Antique Stock Broking.

With SBI, Kotak Institutional Equities says, few of the identified risks had played out. “Our conversation with investors usually focusses on what can go wrong with SBI than what is probably going favourably for the bank. Last year had issues with a specific conglomerate, ECL provisions, MTM losses, unsecured loan growth, wage settlement and importantly capital adequacy ratios. The eventual impact on earnings is far lower as compared to the risks that we tend to assign to these issues,” the brokerage said.

Margin decline to be arrested at current levels: Management

Its net interest margins (NIMs) have declined both on an annual and a sequential basis, as it repriced its term deposits. But that has also not rattled analysts, who believe that the NIM decline has been lower than expected.

“Margin declined by 28 YoY and 7 bps QoQ as increase in cost of deposits due to deposit re-pricing at higher rates (mainly term deposits) outpaced yield on advances. The management highlighted that going forward, margin decline is expected to be arrested at current levels as majority of the deposits have been re-priced,” said Axis Securities.

Particulars	Q3FY24	YoY change	QoQ change
Net interest income	₹398.2 bn	4.6%	0.8%
Net interest margin	3.2%	(28bps)	(7bps)
Net Profit	₹91.6 bn	-35.5%	-36.1%
Net NPA	0.6%	(13bps)	0
Provision	₹6.9 bn	-88.1%	496.7
Advances	₹35,195 bn	15.1	5.2
Deposits	₹47,622 bn	13%	1.6%

Source: Phillip Capital

Best placed for good credit growth

In the third quarter, its advances grew by 15% YoY, with retail and SME segments growing by 15% and 19%, respectively. Its agri loan book grew 18% YoY, while corporate growth too picked up to 11% YoY. Its auto and Xpress credit grew at 21% and 16% YoY, respectively.

Most analysts believe that it has a good headroom with deposits that can cushion loan growth. The management remains confident to grow by 14-15% with opportunities under Aatma Nirbhar Bharat scheme, renewable energy loans.

It’s also aggressively looking at growing its agri loan portfolio to capture the entire value chain. It launched two new products — Agri Enterprise Loan and Kisan Samradhi to acquire high value farmers.

“We expect SBI to grow at 13% CAGR over FY24-26 due to tight system liquidity. We have cut loan growth by 1% for all coverage banks except SBI, given upside risks as the following levers may support credit offtake viz. low loan-to-deposit ratio (LDR) at 74% adequate liquidity coverage ratio (LCR) at 131% and sufficient Common Equity Tier 1 capital (CET1) at 11%, post RBI norms on re-classification of investments,” said Prabhudas Liladher.