State Bank of India Ltd (SBI) has reported an impressive jump of 51% year-on-year (y-o-y) in its September quarter (Q2FY25) standalone pre-provisioning operating profit (PPoP) to ₹29,295 crore. But a closer look reveals that the results are not as strong. In fact, the quality of earnings is weak.
For perspective: core PPoP has dropped 2.5% to ₹23,764 crore. Core PPoP is operating profit excluding volatile incomes such as treasury, forex gains, recoveries of past bad loans, etc. Also, it has been calculated before the provisions for employee cost that are mainly for the wage-hike settlement effective from November 2022. Employee provisions drastically fell to ₹2,906 crore from as much as ₹9,221 crore a year ago as the base quarter included the impact of wage-hike provisions.
Net interest income (NII) was up 5.4% to ₹41,620 crore in Q2FY25. This is despite relatively higher growth in domestic advances by 15% against 9% in deposits. Thus, the muted NII growth reflects the pressure on net interest margin (NIM). SBI’s NIM, including domestic and foreign offices, fell 15 basis points (bps) to 3.14%. While yield on domestic advances was flat at 8.87%, the cost of domestic deposits went up 38 basis points (bps) to 5.03%. Some of the cost pressures on deposits could be offset by achieving a higher yield on investments.
The management emphasized that it has taken corrective steps by increasing the marginal cost-based lending rate (MCLR) by about 20 bps on an average across all tenures during Q2FY25, which should have a positive effect on NIM. Note that MCLR-linked loans form 42% of the bank’s total loans. Even if there is an interest-rate cut by the Reserve Bank of India (RBI), SBI’s management sounded confident of maintaining current NIM given the cushion of 20 bps available on MCLR linked loans.
Meanwhile, SBI seems to be making efforts to grow loans by waiving some of the processing fees to beat the competition. This could possibly explain the 17% drop in loan processing charges even as loan growth stood at about 15%. Notably, core fee income was up almost 5% last quarter to ₹6,834 crore. Provisions for bad loans doubled y-o-y to ₹3,631 crore. Still, reported net profit was up 28% to ₹18,332 crore. This was made possible by doubling of non-core other income to ₹8,437 crore, which includes treasury gains that were up 130% to ₹4,641 crore, and recoveries from fully written off accounts.
While the management admitted that it is difficult to forecast treasury income, the gains from fully written off accounts could largely continue in the coming quarters as well. Nonetheless, the management was reluctant to raise its FY25 RoA guidance of 1% even though annualized RoA for Q2FY25 stood at 1.17%. This could be owing to the fact that the management is cognizant that the quarterly RoA was boosted by volatile non-core other income.
Asset quality improved sequentially as gross NPA and net NPA fell by 8 bps and 4 bps, respectively, to 2.13% and 0.53%. For FY25, SBI has guided for a loan growth of 14-16% and deposit growth of 10-11%.
To be sure, investors are sitting on handsome gains so far in 2024 given that SBI’s shares are up 31%, significantly beating the 7% increase in the Bank Nifty Index. However, the subdued stock price reaction to the Q2FY25 results shows that further near-term upsides may be difficult amid muted core profitability.
