Banking major State Bank of India (SBI) has really beaten all street expectations with net interest income up by 43% at Rs 9,050 crore for October-December 2010. CNBC-TV18 had estimated the figure at around Rs 8,323 crore. Meanwhile, the net profit has gone up to Rs 2,828 crore for the third quarter compared to Rs 2,479 crore same period last year, which is up about 14%. The street estimate was about Rs 2644 crore.
Reflecting on the stellar Q3 performance, Hemindra Hazari of Karvy Stock Broking said the numbers were on expected lines. “This will be the last reporting quarter of the existing Chairman who mind you has had the longest tenure since the legendary RK Talwar was the chairman in 1970s,” he explained.
Hazari expected to see an increase in NPA levels for the bank. “In the last one to two years there has been an urgent effort by the management to increase this market share and credit,” he stated.
According to Vaibhav Agarwal of Angel Broking the bank performed quite well in this quarter both on asset quality as well as the net interest income front. On Q4, he said, "They get a lot of float income and fee income from government and other sources. So, they will have enough of a buffer to take slightly higher provisioning expenses in the fourth quarter."
Below is a verbatim transcript of the interview.
Q: Your initial reaction to SBI’s numbers? It has really surpassed all expectations?
Hazari: The numbers have surpassed expectations but I think this is to have been expected because please bear in mind this will be the last reporting quarter of the existing Chairman who mind you has had the longest tenure since the legendary RK Talwar was the chairman in 1970s. So we were expecting SBI to have better-than-expected results and I think that is what these results have shown.
You can also see that the provisions have been much lower than what analysts have been expecting and I have always maintained that for State Bank of India it will be fourth quarter, which should really be the decisive quarter where one can evaluate the entire performance of State Bank for financial year 11.
Q: Also as far as their provision coverage ratio is concerned it’s about 64%, they need to go to 70% as well on that—do you think that will come in the fourth quarter?
Hazari: The 70% coverage, I believe, will be met by the September of this year. So even by March I don’t think they will achieve 70%. Bear in mind, also, at the moment we are assuming that there will be normal growth in NPAs. We could be in for a slight surprise in the fourth quarter on that because if the NPAs start increasing then the 70% coverage on the enhanced NPAs.
Q: NPAs, in fact, on a QonQ basis have increased it by about Rs 50 crore. Where do you see that going forward?
Hazari: In my opinion, in the entire banking industry you will see an increase in NPA’s and that will really materialize in quarter four. They will be primarily driven by lot of small accounts in the sub-Rs 15-25 crore account category.
In the case of SBI, there maybe even a further acceleration in NPA because in the last one to two years there has been an urgent effort by the management to increase this market share and credit. Therefore we believe that going forward there could be a build up in NPAs of State Bank of India.
Q: First your initial reaction to the numbers?
Agarwal: The numbers were definitely higher than our estimates. If you look at the profit before tax figure, it was about 10% higher than our estimates. Broadly on the asset quality front as well as on the net interest income front the bank has performed quite well in this quarter.
Q: The provisions, of course, were much lower than what analyst and the street was really expecting. What happened there, where do you see that going forward—do you think that hit will come more in Q4?
Agarwal: We don’t have all the numbers regarding the slippages but I think those would have been lower and the banks may also have seen some strong recoveries and upgrades because even with the lower provisioning expense they have managed to increase the provision cover. There is nothing to complain about there.
Again, when it comes to fourth quarter numbers what happens with SBI in the fourth quarter, they get a lot of float income and fee income from government and other sources so they will have enough of a buffer to take slightly higher provisioning expenses in the fourth quarter in any case. However, if you look at the overall asset quality there is clearly an improving trend.
Q: What about the provisions for the teaser home loans, which SBI also had to provide at 2% instead of the 0.4%—how does that pan out?
Agarwal: We don’t have all the details but we would have to assume at this point that the provision expense that is being reported would include that sum as well. It is after that they still manage to show a decline in provision expenses. But, of course, we await further details from the management.
Q: As far as the margins of SBI are concerned, of course, we have to wait for the management to tell us that—but where do you see margins. On one hand the PLR hike that SBI took was not inline with the deposit rate hike which was quite aggressive but on the other hand they have very strong CASA ratios. Do you think margins will be impacted or by how much do you think they would be impacted?
Hazari: In Q3, what we have seen is, all of the large banks which have reported their margins actually have increased over Q2, which is slightly surprising because they have been able to do re-pricing of their loans. In Q3, I don’t think there will be a problem for bank margins. The impact will be felt in Q4 and Q1 of the next year.
So I don’t think that you will find any problems with bank margins for Q3—at best they could remain constant as compared to Q2.
Q: What is the entire outlook for SBI by end of this fiscal?
Hazari: We were expecting earnings to be quite flattish for the entire financial year because we believe that Q4 you will see a sharp increase in NPAs which will require further enhanced provisioning. This will be in addition to—because they are bellow the 70% coverage ratio—so even for the old NPAs they have to bring it up to 70%. We believe that there will be more NPA build up in SBI which will increase the bad debt provisioning. Therefore, our estimates for full financial year 2011 would be very flat.
We do not see much earnings growth taking place this year. As I have said, fourth quarter will be a decisive quarter for SBI and third quarter may not give you an accurate picture of actually how the full year is going to pan out.
Q: What is your view on the NIMs and what is your outlook for SBI for the entire fiscal?
Agarwal: As far as the NIMs are concerned, SBI is one of the very few banks where, given where their CASA ratio is, their NIMs are anyways been much lower than their potential. Unlike other banks whether it be larger or the smaller ones we are factoring declining NIMs to the other banks, but in the case of SBI, they do have other levers to really counter margin pressures.
They have done well in this quarter and even if they see a marginal decline again in fourth quarter, broadly, still if you look at the overall year as well as going into FY12 on the margin front, SBI should outperform its peers.
