SBI likely to report sharp fall in Q2 profit, but slippages may be stable

Country's largest lender State Bank of India is expected to register more than 50 percent fall in the second quarter profit compared to year-ago.

Elevated provisions, tepid growth in net interest income, and lower other and operating income may hit profitability.

Brokerage houses Nomura, Motilal Oswal, Emkay Research and Prabhudas Lilladher see 40-97 percent fall in Q2 profit YoY. Kotak expects Rs 740 crore loss due to elevated provisions.

Provisions

Provisions are expected to remain elevated, though there could be a fall on year-on-year as well as sequentially.

Brokerages said provisions would be high due to ageing of NPLs and MTM provisions on investments due to rising interest rates.

Prabhudas Lilladher expects provisions to fall 32 percent YoY and QoQ while Nomura sees 40 percent fall year-on-year as well as sequentially.

NII and Loan Growth

Net interest income growth is likely to be more than 10 percent in the quarter ended September 2018 YoY. Loan growth is likely to be around 5-10 percent with steady margin.

"We factor in lower than industry loan growth but factor in steadier margins as MCLR effect comes in with lower interest reversals leading to 16.5 percent YoY NII growth," said Prabhudas Lilladher which expects NII growth at 16.5 percent with a 5 percent rise in advances YoY.

Kotak expects loan growth at around 10 percent YoY and NIM to decline/flat QoQ around 2.8 percent (one-off interest income booked in Q1FY19). NII growth is expected to be around 13.4 percent.

Retail loan growth momentum should continue to remain strong, while international book should continue to decline and shrink, Emkay Research said.

Prabhudas Lilladher said pre-provisioning operating profit growth should be slower on much lower other income and some inch up in operating expenses while Kotak said non-interest income may be flat due to a steep decline in treasury income but partly offset by higher recovery from written-off loans.

Asset Quality

Asset quality is likely to see some improvement on sequentially due to stable slippages in Q2, but may remain elevated as brokerage houses remain concerned about the existing pool of NPAs.

Prabhudas Lilladher, which expects gross non-performing assets (GNPA) to fall 33 percent QoQ, said it has factored in a slight improvement in asset quality as slippages trend is expected to be stable and continue to see upgrades/recoveries.

Motilal Oswal, which have a buy call on SBI, said stress additions should moderate to 2.8 percent as it believes that most of the stress has been recorded in previous quarters. It sees GNPA falling 50 bps QoQ.

It expects credit cost to moderate from existing levels, with resolution from NCLT referred accounts to provide some relief.

Kotak also expects slippages to decline to below 3 percent as recognition is complete while gross NPLs could decline with further resolution in smaller NCLT cases/write-offs.

Key issues to watch out for

> Performance and guidance on asset quality and retail slippages

> Recoveries from resolution of NCLT accounts

> Outlook on power sector assets and macro developments on asset quality