State Bank Of India
The State Bank of India (SBI) announced spectacular results in the second quarter, with 74 percent growth in net profit on the back of a 20 percent rise in loans, and margins expanding by 30 basis points to 3.3 percent.
The icing on the cake was an ROA (return on assets) of 1 percent, not seen since the stock listed, which in turn was made possible by a decadal low credit costs — just 27 basis points (bps).
The big question now is: can SBI sustain this performance. The credit cost of 27 bps is clearly tough to sustain. Nearly five years of cleaning up the balance sheet and the provisioning, and austere lending in a Covid-crippled economy, has brought down the credit cost.
With credit growth in the mid-teens, and more unsecured loans, a more normalised rise in loan defaults should be expected, which will push up credit costs a bit.
Margins could remain elevated, even rise a bit, in H2, given that the Chairman has said that the bank still has Rs 3.5 trillion in investments which can be encashed if loan demand rises.
But thereafter, the bank will have to start raising deposit rates to find the money for new loans. Hence, margins are likely to get compressed, or at least stop rising, in FY 24.
Loan growth can remain in the mid-teens, as the economy is in recovery mode, but growth beyond 16 percent will depend on the macro economy.
Right now, Indian exports are plateauing because of recession fears in the West and in China. However, the pick-up in the domestic capex cycle provides some hope. Renewable power apart, the rest of the loan demand is still for brownfield expansions in steel, paints, and cement. There have been no greenfield expansion announcements.
Retail loan demand is holding up, but as infotech companies dial down pay hikes, and capital expansion remains restrained, retail loan demand can also plateau. The consensus view on India's GDP growth is 6 percent for FY24. (RBI says 6.2 percent, IMF 6.1 percent, and many well regarded brokerages foresee about 5.8 percent).
For a GDP growth of 6 percent, loan growth beyond 15-16 percent is not possible. Thus, SBI’s finest hour may be the present one. Some plateauing is to be expected thereafter.
A bigger fear is that FY24 being an election year, the bank may be under pressure to lend more liberally. One hopes the exuberant lending of 2009 to 2012 doesn't recur, backed by the all-round self-congratulatory showboating about India being the only show in town.