Despite overall progress in terms of asset quality and profit in the December quarter (Q3), investors have been lukewarm to the shares of State Bank of India.

The stock fell 10.5 per cent from February 1, after the bank’s Q3 results. It also under performed the Nifty Bank index that fell 2.3 per cent during the same period.

Despite the improvement shown in the last two consecutive quarters, investors are seeking consistent performance.

The bank’s management, on its part, is confident about softening of bad loan or non-performing asset (NPA) with the recovery of Rs 34,000 crore from eight accounts in the coming months. It foresees below 7 per cent gross NPAs and below 3 per cent net NPAs by March 2019 from about 9 per cent and 4 per cent as of December 2018, respectively. But, some accounts could take the sheen off and may also impact the bank’s near-term growth.

With farm loan waivers announced by many state governments recently, the Street is worried about the asset quality pressure of SBI given its large agriculture portfolio. As on December 2018, SBI’s agricultural loan book was over 18 per cent of the entire banking sector’s exposure to the agricultural (including allied activities) sector. Also, agriculture accounted for 10-12 per cent to SBI’s overall gross NPAs at least from the June 2017 quarter.

As seen in the past, though agriculture loans are not a cause of stress for banks, they could face temporary asset quality pressures with an expected delay in reimbursement of loan amount by governments, said G Chokkalingam, founder & managing director, Equinomics Research & Advisory.

Although during its Q3 earnings, the bank had said its agricultural NPAs will remain in the range of 9-11 per cent, the jury is out on this.

Further, SBI has about Rs 11,000 crore exposure to Dewan Housing Finance (DHFL) and Rs 2,200 crore to IL&FS SPVs. Both these accounts were standard in the bank’s book at least till December 2018 quarter. But issues at DHFL and some IL&FS SPVs have been recognised as NPAs by private lenders and are thus worrying. CRISIL also recently downgraded some IL&FS SPVs to default. Although the relief is that the SPVs are functional and have cash available with them, they stopped paying given the legal restrictions.

SBI’s spokesperson declined to comment on individual accounts.

Further, SBI has over Rs 31,000 crore of the potential stressed pool (watch list and SMA 1 & 2) as of December 2018. All the above-mentioned factors could take a toll on capital adequacy and growth of the bank in the near term.

Barring DHFL and expected NPAs from its agriculture book, other potential sources of stress could amount to over 22 per cent of SBI’s net worth adjusted for net NPAs as of December 2018. Its tier-1 capital and total capital adequacy stood at 10.54 per cent and 12.77 per cent, respectively. Also, slower growth of deposits is another challenge for the entire banking sector.