Improved cost ratios to boost SBI’S profitability

India’s largest PSU bank, State Bank of India, delivered excellent results, once the impact of a big jump in employee expenses was adjusted for. The net interest income (NII) beat the Street due to a better net interest margin (NIM) and good loan growth.

The credit growth at 5.2 per cent quarter-on-quarter (Q-O-Q) (15 per cent year on year) was excellent for a large bank. The NII was reported at ~39,800 crore (up 4.6 per cent Y-O-Y) due to better NIM at 3.07 per cent (3.04 per cent in Q2FY24) and stronger loan growth.

Deposit growth was 13 per cent Y-O-Y and other income was at ~11,460 crore (up 6.2 per cent YO-Y) due to a combination of higher fees and treasury gains.

The operating expenditure was broadly in line at ~30,940 crore (up 27 per cent due to wage hikes). An exceptional item was an extra ~7,100 crore related to employee liability – including ~5,400 crore pensions and ~1,700 crore ex-gratia.

The core pre-provision operating profit (PPOP) was at ~16,030 crore, while PPOP stood at ~20,330 crore. Asset quality was stable and gross net performing assets (GNPA)/NET NPA declined by 13 basis points (bps) and 2 bps Q-O-Q to 2.4 per cent and 0.6 per cent, respectively.

Gross slippages were lower at ~5,050 crore (~5,250 crore in Q2FY24). Provisions were lower at ~690 crore due to write-backs.

The restructured pool was 0.33 per cent of advances. The core net profit was ~11,300 crore adjusted for that one-off , net profit was ~14,400 crore.

The sequential loan growth was broad-based with domestic credit offtake driven by corporate (up 4.7 per cent Q-OQ), SME (up 7.5 per cent Q-O-Q), agri (6.5 per cent ) and retail (4.3 per cent). Due to the RBI directions, pricing has been increased for unsecured and non-banking financial company (NBFC) loans.

The SBI management guided for 14-15 per cent loan growth in FY25 though there is tight liquidity.

The Credit Deposit Ratio (CDR) is at 66 per cent and the Loan Deposit Ratio (LDR) is good at 73.9 per cent (71.3 per cent in Q2FY24) and the Liquidity

Coverage Ratio (LCR) is excellent at 131 per cent.

So, there is room for higher credit growth for SBI, than for peers which have higher CDR and LDR. The CAR (Capital Adequacy Ratio) is at 13 per cent and the Common Equity Tier (CET-1) is at 11 per cent after adjusting for RBI’S reclassification of investments, which is adequate.

The employee costs for FY24 may end up at ~77,300 crore (up 35 per cent Y-O-Y compared to FY23) due to the wage revision impact of an extra ~18,000 crore. But costs on this front will normalise in FY25 with the guidance at ~66,000 crore.

The bank has also made efforts to significantly strengthen its balance sheet and has a healthy provisioning coverage on its corporate book at 92 per cent. Assuming recovery in corporate demand, the bank could meet its 14-15 per cent credit disbursal growth target but it would be conservative to expect a slightly lower growth rate.

The bank has seen a consistent decline in its net NPA ratio to 0.6 per cent. At this level, credit costs will remain under control at 35-40 bps. After the residual wage provisioning, cost ratios should improve in FY25 to boost profitability.

The bank has invested in digitisation and targets end-toend digitisation.

Around 59 per cent of new savings accounts are now opening online and business worth ~95,000 crore is sourced through analytics (up 37 per cent Y-O-Y). The stock has gained a net 6 per cent since the results and bullish analysts see decent upside.