SBI still has few hurdles to cross; retail focus can help
ET Intelligence Group: State Bank of India (SBI) beat Street expectations on profit expansion and asset quality , but muted credit-growth outlook and slower resolution of sticky loans would cap potential gains for the stock.
After rallying 80% in the past year, the SBI stock may continue to trade near current valuations of 1.25 times its FY18 book value. SBI is the most expensive public-sector bank (PSB) commanding valuations richer than that of Punjab National bank, the best performing PSB that rose about 90% in the same period.
To be sure, the latest results show SBI managed to maintain a stable proportion of bad assets compared to total loans; gross non-performing asset ratio increased at its slowest pace in six quarters to 7.23%. Had it not been for a muted growth in its advances -loan book reported its slowest quarterly growth at least in three years -the ratio may have fallen. It has acknowledged about half its watchlist -the universe of stressed accounts it expects to go as bad -as NPA in the last three quarters.
The bank is also confident of not overshooting its FY17 guidance of Rs 40,000 crore of fresh slippages into NPAs, with the quantum for three quarters at Rs 2,931 crore. Improving risk profile of the business, with in creasing proportion of loans with credit rating “A“ and above in its current stock and new advances, is also good news.
Yet, SBI acknowledged that demonetisation has postponed resolutions, and significant stress reduction may happen only when the economy im proves and demand picks up. The bank's guidance of 11% credit growth in FY18 thus, raises hopes on asset quality improvement even as the base effect will play a role in this expansion.
It lowered its FY17 credit growth guidance to 6.5%, almost half of what it had envisaged at the start of the year.
At a time when loan demand from SME and mid-sized companies is con tracting, the bank will have to sustain its focus on retail segment, where it is expanding business at about 20% in the last few quarters to offset the impact of poor asset quality . SBI's total stressed book -gross NPA and restructured standard advances stands at Rs 1.43 lakh crore, while a quarter of fresh slippages in FY17 so far (Rs 5,493 crore) has come from out side the watchlist.
While GNPA of mid-corporate seg ment has stabilised in the last two quarters, the ratio for large corpo rates witnessed a sharp sequential jump of 129 bps to 8.7% in the December quarter. The Rs 2,000-crore reprieve it took based on RBI special dispensation in this quarter has also limited bad asset additions.
After rallying 80% in the past year, the SBI stock may continue to trade near current valuations of 1.25 times its FY18 book value. SBI is the most expensive public-sector bank (PSB) commanding valuations richer than that of Punjab National bank, the best performing PSB that rose about 90% in the same period.
To be sure, the latest results show SBI managed to maintain a stable proportion of bad assets compared to total loans; gross non-performing asset ratio increased at its slowest pace in six quarters to 7.23%. Had it not been for a muted growth in its advances -loan book reported its slowest quarterly growth at least in three years -the ratio may have fallen. It has acknowledged about half its watchlist -the universe of stressed accounts it expects to go as bad -as NPA in the last three quarters.
The bank is also confident of not overshooting its FY17 guidance of Rs 40,000 crore of fresh slippages into NPAs, with the quantum for three quarters at Rs 2,931 crore. Improving risk profile of the business, with in creasing proportion of loans with credit rating “A“ and above in its current stock and new advances, is also good news.
Yet, SBI acknowledged that demonetisation has postponed resolutions, and significant stress reduction may happen only when the economy im proves and demand picks up. The bank's guidance of 11% credit growth in FY18 thus, raises hopes on asset quality improvement even as the base effect will play a role in this expansion.
It lowered its FY17 credit growth guidance to 6.5%, almost half of what it had envisaged at the start of the year.
At a time when loan demand from SME and mid-sized companies is con tracting, the bank will have to sustain its focus on retail segment, where it is expanding business at about 20% in the last few quarters to offset the impact of poor asset quality . SBI's total stressed book -gross NPA and restructured standard advances stands at Rs 1.43 lakh crore, while a quarter of fresh slippages in FY17 so far (Rs 5,493 crore) has come from out side the watchlist.
While GNPA of mid-corporate seg ment has stabilised in the last two quarters, the ratio for large corpo rates witnessed a sharp sequential jump of 129 bps to 8.7% in the December quarter. The Rs 2,000-crore reprieve it took based on RBI special dispensation in this quarter has also limited bad asset additions.
