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Read More >SBI shares rise despite worst quarterly loss: 4 things to know
Publish date: 25th May, 2018
State Bank of India (SBI) posted a record loss of Rs. 7,718 crore in the last quarter of FY18 ended March 2018. This is the second quarter in a row that the bank has suffered a net loss. What may surprise some is that despite reporting the second largest loss by a bank ever, SBI’s stock price did not take a beating. Instead, analysts are recommending a buy, and the share price rose after the results were declared. Let’s understand why:
It’s not just SBI
FY18 was the worst year the public-sector banks (PSBs) have seen thus far. The massive losses in the March quarter wiped off any profits SBI made in the previous three quarters. As a result, the consolidated loss for the year is at Rs. 4,556 crore. The scam-hit Punjab National Bank posted even steeper loss of Rs. 13,417 crore in the January-March 2018 quarter. This is nothing but PSBs acknowledging and identifying the non-performing assets (NPAs) that they have been saddled with.
Spring cleaning
SBI’s books have bad loans worth Rs 2.2 lakh crore. This is 10.91% of its total loans. While this is a drastically high amount, it’s lower than the 12 PSBs who have a gross NPA ratio of over 10%. In fact, the average gross NPAs of all PSBs of 13.41%, as per news reports. The quarter saw the bad loans by all the 21 PSBs to rise to a whooping Rs. 7.31 lakh crore.
But, it is important to realize that the rise in provisions and NPAs is the result of changes in the RBI guidelines. These new rules call for early detection of NPAs. The rise in NPAs does not reflect any change in how the banks operate.
Meaning, earlier bad loans are just coming to light now. They were otherwise disguised as normal in the balance sheet.
This is why many look at the latest NPA announcements in a positive way. After all, acknowledging the NPAs is the first step of shedding these and improving the risk management process.Light at the end of the tunnel
This clean-up is expected to aid the banks going forward. Moreover, it allows the banks to reboot, helped in part by the government’s promise to infuse capital.
Further, the SBI chairman assured the markets that the bank is planning to get the gross bad loans to less than 6% by March 2020. The bank targets a net NPA of less than 2.3% too. Most important, however, is the slippage ratio—which measures the creation of new bad loans—is expected to be under 2%.
These may not be the most ambitious numbers. But, they seem to be promising enough to have likely boosted market confidence.
What our Research says:
Our expert analysts at Kotak Institutional Equities believe that this round of identification of bad loans (a.k.a, stress recognition in market parlance) at SBI is promising. It could indicate a fresh trend that the bank is getting itself out of the woods.
Another positive factor to note is that while bad loans have risen, the CASA ratio has remained stable. CASA is nothing but deposits in current and savings accounts as a percentage of total deposits. This matters because deposits in the current/savings accounts act as a cheap source of lending for banks. If banks have to resort to costlier lending, then it could affect profitability. This is why the overall outlook remains positive for SBI.
Do you want to know how to buy or sell State Bank of India shares? Read our recommendation for SBI shares here.
