State Bank of India Shares Rally on Soured Debt ‘Surprise’

  • Net income drops 32 percent, loan provisions almost double
  • Lender’s shares rally to highest level since December

State Bank of India, the country’s largest lender by assets, climbed to an eight-month high in Mumbai stock trading as the firm reported a smaller increase in soured debt than expected in the first quarter.

Bad loans as a percentage of total lending rose 44 basis points since March to 6.94 percent by June, the Mumbai-based bank reported in an exchange filing. The increase was a fraction of the 116 basis-point surge reported by rival Bank of Baroda on Thursday. SBI said net income in the June quarter sank 32 percent from a year earlier.

Chairman Arundhati Bhattacharya, whose three-year term at the helm of SBI ends in October, and her peers are battling to reduce surging bad loans that have curtailed profits. ICICI Bank Ltd., SBI’s largest private-sector competitor, said two weeks ago that provisions for delinquencies more than doubled in the June quarter from the previous year. The soured-debt ratio for India’s banking system is at the highest in 16 years.

“SBI managing to keep a check on surge in bad loans came as a surprise,” said Rethish Varma, head of research at Bengaluru-based Aditya Trading Solutions Ltd. “Investors are cheering as they think that the bank has managed to take the bull by the horns and tame it too.”

Stock Rally

Shares of the lender closed up 7.1 percent at 243.3 rupees in Mumbai, the highest price since Dec. 2. The stock climbed 8.4 percent this year, compared with the 13 percent gain in the S&P BSE India Bankex Index, which tracks 10 lenders.

For SBI, net income for the June quarter dropped 32 percent to 25.2 billion rupees ($377 million) from a year earlier, matching the 25 billion-rupee average of 23 analyst estimates compiled by Bloomberg. The company reported bad-loan provisions of 63 billion rupees for the period. While that amount was almost double from a year ago, it was about half the figure SBI set aside in the March quarter.

Here are other key earnings figures reported by the bank:

  • Outstanding loans rose 11% to 14.6 trillion rupees from year earlier
  • Net interest income increased 4.2% to 143 billion rupees
  • Non interest income up 44% to 73.4 billion rupees
  • Operating expenses gained 10% to 105.9 billion rupees
  • Capital-adequacy ratio improved to 14% from 12%; compared with at least 9 percent required by March 2019 under Basel III rules
  • Gross nonperforming assets up 80% to 1 trillion rupees

At a briefing with reporters in Mumbai after the earnings, Bhattacharya said the lender is maintaining its watch list of stressed assets at 310 billion rupees.

“The resolution process of nonperforming loans is yet to gather pace,” Bhattacharya said. “It should pick up from third quarter onwards. It still is too early to give a target for nonperforming loan ratios for the end of the year.”

Bank of Baroda, the country’s second-largest state-run bank, reported Thursday a bad-loan ratio of 11.15 percent as of June 30, up from 9.99 percent in March. The lender posted a 60 percent slump in profit for the June quarter from the previous year, as its provisions for soured credit more than tripled.

Credit Monitoring

Bhattacharya has pushed SBI to strengthen its credit-monitoring measures, to identify loans that may default and to take steps to recover them. The bank tightened eligibility criteria to focus lending toward companies less likely to default, Bhattacharya said in 2014. She leads a panel that works on retrieving sour loans greater than 5 billion rupees.

Last month, the bank signed a memorandum of understanding with Brookfield Asset Management Inc., Canada’s largest alternative asset manager, to set up a joint venture to invest in stressed assets in India.

“The focus on the recovery of bad loans will continue as the key theme for SBI in coming quarters, even as Bhattacharya passes the baton to her successor,” Siddharth Purohit, an analyst at Angel Broking Ltd. in Mumbai, said before the earnings were released.

India’s government, which holds 60 percent stake in the bank, has yet to make an announcement regarding the new chairman.

The proportion of Indian banks’ stressed assets to total advances surged to a 16-year high of 11.5 percent as of March 31, Reserve Bank of India data show. In December, RBI Governor Raghuram Rajan set lenders a March 2017 deadline to rid their balance sheets of bad debt, which have curbed their ability to extend loans.

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