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Despite stellar fourth quarter, SBI associate banks’ bad loans unnerves investors

LiveMint logoLiveMint 22-05-2017 Alekh Archana

Mumbai: State Bank of India’s (SBI) strong performance in the fourth quarter has failed to cheer investors because the large stock of bad loans of the associate banks that the bank inherited post merger is expected to weigh on the financials going ahead.

Effective 1 April, SBI merged five of its associate banks with itself.

SBI hit a low of Rs301.35 and fell as much as 2.21% in intraday trade. At 2.50pm, SBI was trading at Rs293.60 on the BSE, down 4.7% from previous close, while India’s benchmark Sensex index rose 0.26% to 30,543 points.

In the three months to March, SBI reported a net profit of Rs2,814.82 crore. However, the merged entity reported a net loss of nearly Rs3,000 crore for the fiscal fourth quarter because of near Rs6,000 crore of losses that the associate banks reported, calculations by brokerage firm Jefferies showed.

The associate banks have been reporting losses. In April-December, total losses of these five banks was Rs5,905 crore.

According to Motilal Oswal Securities, the losses were driven by continued harmonization of accounting policy, especially on the asset quality, with SBI.

Other ratios of the merged entity were also poor compared to the standalone numbers of SBI.

Consolidated gross non-performing assets (NPAs) ratio was at 9.11%, higher than 6.90% of the standalone entity. In absolute terms, gross NPAs of the standalone entity was at Rs1.12 trillion at the end of March. The consolidated gross NPA was Rs1.79 trillion.

Look at it another way, SBI added Rs4,000 crore of bad loans in the three months to March. The associate banks (and other businesses like credit cards, overseas subsidiaries etc.) added Rs11,000 crore to gross bad loans.

Similarly, capital adequacy ratio and provision coverage ratio of the merged entity was at 12.85% and 61.53%, respectively, lower than 13.11% and 65.95% of SBI.

Broking firm Ambit Capital said in a report to its investors that it was greatly disappointed with the decline in the aggregate loan book and asset quality stress of associate banks even as the trends for the standalone bank were in line with its expectation. The brokerage firm has maintained a “sell” rating on the stock but did not change its target price of Rs250 a share.

On Friday, SBI chairman Arundhati Bhattacharya said that there’s going to be a “little more pain in the near term” and credit costs, which is a percentage of provisioning against the total advances, is expected to remain “slightly elevated” in the current year as stressed asset resolution accelerates.

For fiscal 2016-17, SBI had to set aside Rs61,290.88 crore as loan provisions. Back of the envelope calculations, showed that for associate banks this number was around Rs25,298 crore. This is a derived number and some part of the provisions may include those related to insurance and credit card businesses. However, a large share of the provisions are expected to be related to the associate banks.

The management has guided for higher credit cost in the current financial year and expects normalisation only in the next fiscal. That apart, it has also said that margins may remain under pressure because resolution of large stressed loans may require sacrifice in the form of haircut and upfront provisioning to cover those losses, Ambit Capital said.

SBI also revised its consolidated watchlist of stressed loans to Rs32,427 crore from Rs13,310 crore on standalone basis as at the end of December. According to brokerage Nomura, around Rs10,000 crore of watchlist accounts are attributed to the five associate banks.

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