Under Arundhati Bhattacharya, the bank has decided to focus on a ‘risk-mitigated’ approach to keep bad loans under check

The elephant might not be dancing but it’s surely trying to keep its flab under check.

State Bank of India, which controls 17 per cent of India’s loan market, has gone off the beaten track by slowing its pace of growth, a decision in tune with the macroeconomic environment.

On a year-on-year basis, SBI’s loan growth was 6.9 per cent till December-end, compared with the sector’s growth of 9.1 per cent.

Analysts say it’s a strategy that has been well thought through and at variance with the usual practice of public sector banks, which are obsessed with top line growth to meet the targets in the statement of intent at the beginning of a year.

Also, they are usually in a mad rush to collect deposits whenever a quarter nears its end.

The result has been creditable.

By the end of 2013, the bank’s gross bad loans stood at a staggering Rs 67,799 crore (RS 677.99 billion), an increase of about Rs 6,500 crore (Rs 65 billion) in nine months.

Net profit for the third quarter of 2013-14 had declined a whopping 34 per cent to Rs 2,234 crore (Rs 22.34 billion).

But Arundhati Bhattacharya, who took over as the chairman in October 2012, has been able to bring down gross non-performing assets by about Rs 6,000 crore (Rs 60 billion) in the past year.

This firm control over asset quality was cheered by the markets, with the stock soaring eight per cent after it announced its December quarter earnings on Friday, though the bottom line growth was below the consensus Street estimate.

“Considering the weak results of public sector banks, SBI reported a strong performance, with negligible changes to the outstanding share of impaired loans,” Kotak Securities wrote in a note to clients.

The report noted fresh impairment was at a two-year low, led by low slippages in the mid-corporate, retail and agriculture segments.

It, however, cautioned a sustainable improvement was still a few quarters away.

According to analysts, growth in fresh slippages moderated to 2.3 per cent (annualised) from 2.9 per cent in the first half and growth in restructured loans was also under check.

Fresh standard asset restructuring stood at about Rs 2,500 crore (Rs 25 billion), about half of what was reported a few quarters earlier.

SBI estimates its loan restructuring pipeline at Rs 5,500 crore (Rs 55 billion) for the current quarter, higher due to closure of the regulatory forbearance window from April 1.

“The ballpark figure of the restructuring pipeline is Rs 5,000-5,500 crore (Rs 50-55 billion).

"It is a little on the high side.

"I’m giving a higher number because we do not know what will happen during this quarter.

"As you know, when you have a particular window closing, there is a little bit of rush,” Bhattacharya said.

Risk-mitigated approach

After it saw its bad loans hitting a record high, the first thing SBI did was adopt an approach of loan disbursal that was in consonance with the macroeconomic environment.

The lender was seeing a surge in NPAs from the small and medium enterprise sector, which is more vulnerable during an economic downturn.

Bhattacharya says the bank has 'consolidated and changed' its entire product suite for SMEs.

“So, all the products we have brought in now are risk-mitigated. We are going to grow in SME in a very different manner,” Bhattacharya said after announcing the December quarter results.

SBI decided to keep its SME book flat in the past year, though this meant its market share falling by a percentage point.

Though the sector is still struggling and contributing heavily to fresh NPAs, SBI has been able to arrest the rising trend.

NPAs from the SME sector fell to Rs 16,247 crore (Rs 162.47 billion) in the December quarter from to Rs 17,382 crore (Rs 173.82 billion) during the year-ago period.

SBI, whose exposure to the SME segment stands at 13 per cent, has roped in the Boston Consulting Group to assist in altering its products and processes in this regard with an aim to see growth in two quarters.

Flat loan book

SBI has pruned its loan growth projection for this financial year to 10 per cent from 15 per cent earlier.

In the past two financial years, loan growth was 15 per cent and 20 per cent respectively.

While overall credit growth has remained low, the bank has been fairly aggressive in secured loan segments such as home loans and automobile loans.

Home loans, which account for about 60 per cent of the bank’s total retail loan portfolio, have grown 13.15 per cent, while auto loans increased 10.84 per cent.

Tight cost control

The lender has also brought in tight control on costs, resulting in a decline of 435 basis points in the expense ratio for the December quarter.

For the quarter, growth in operating expenses was 5.5 per cent at Rs 9,730 crore (Rs 97.3 billion).

“Staff expenses declined 0.4 per cent year-on-year, resulting in a mere 5.5 per cent growth in operating expenses.

Other income growth was healthy at 24.3 per cent year-on-year, which resulted in the cost-to-income ratio falling by 362 basis points year-on-year to 51.1 per cent,” said Vaibhav Agrawal, analyst with Angel Broking.

Growth in staff expenses was flat, despite an increasing run rate of wage provisions — from Rs 4,600 crore or Rs 46 billion a quarter to Rs 7,200 crore (Rs 72 billion) a quarter -- and pension run rate (from Rs 6,400 crore or Rs 64 billion a quarter to Rs 8,200 crore or Rs 82 billion).

Stable margins

The conscious decision to focus on high-yielding assets such as retail has resulted in stable margins during the past six quarters.

The bank’s net interest margin from domestic operations has remained between 3.48 per cent and 3.54 per cent since the September quarter of 2013.

“The management has guided(forecast) it expects to hold on to margins at existing levels, but the trajectory of deposit costs has to reduce; otherwise, the pressure will remain,” Prabhudas Lilladher said in a report.

SBI had reduced deposit rates twice between September and December last year, while keeping the benchmark lending rate, or the base rate, unchanged.

The Reserve Bank of India had cut the repo rate by 25 basis points to 7.75 per cent in January.

While most parameters show an improvement, Bhattacharya is cautious and says the worst isn’t over yet.

“Going forward, as we are getting more and more risk-mitigated products in our books and a much better monitoring system, we hope to show better number(s)…I hope the worst is behind), but let’s wait for a quarter or two before it is surely the case,” she says.

Nevertheless, a good beginning has been made.