SBI: Exposure to stressed areas, asset quality a big worry

It will be quite a while before India's largest bank State Bank of India, or SBI, can catch up with the valuations of its private sector peers going by the deterioration in its asset quality in the quarter to June.

And considering the higher exposure which SBI has to stressed sectors such as infrastructure, iron and steel, aviation and textiles compared with its private sector peers, the next few quarters will continue to be difficult for the bank operationally in the current macro environment.

The asset quality of SBI is reflective of the broader health of the economy with the bank seen as a proxy for the economy. Its non-performing assets to total advances on a net basis rose 61 basis points year-on-year to 2.22% during the quarter - with the rise being amongst the highest in the industry. This is when ICICI Bank reported an improvement in asset quality and other larger private banks such as Axis Bank and HDFC Bank also reported stable numbers - all below 1%.

The rise in slippages for SBI came largely from its small and medium enterprises, mid-corporate and agri accounts. The amount of net non-performing assets or bad loans rose 63% to 2,0324.01 crore. of this, about 30% each was from the mid-corporate segment and SME segment with the share of the agri segment being 20%. Combined, these segments constitute the majority of its total bad loans and will continue to be worrisome for the bank in an environment of slowing growth as reflected in the disappointing growth in industrial production over the past months. Compounding the problems will be a drought this year.

All this is already reflected in the slower-than-normal off-take of loans. Loan growth was 20% during the quarter at 945819 crore. Of this, 18% or 167756 crore was to the mid corporate segment, 14% or 134319 crore to the SME segment and 13% or 120130 crore was to the agri segment. Deposits grew 16% year-on-year. Net interest income, or the difference between interest earned and interest paid, was up 15% at 11,118.84 crore. Growth fee income or non-interest income was also stagnant with a total income for the bank up just 17% - the slowest in six quarters. Net profit more than doubled for SBI, though on a low base, but this did little for the stock which dropped nearly five percent after the results were announced. Investor worries are now reflected in the fact that though SBI's balance sheet is over five times the size of HDFC Bank's, its market capitalisation is just 0.89 times HDFC Bank's. It currently trades at a price-to-book value multiple of 1.3 times, which is significantly lower than HDFC Bank's 4.5 times, Axis Bank's 2 times or ICICI Bank's 1.8 times.