State Bank of India – Decline in net profit due to one-offs; misses estimates

Sector Outlook – Positive

For the quarter ending December 2023, the bank’s net interest income slightly grew but missed predictions. Operating profits rose, but net profits dropped significantly, largely due to a one-time pension-related charge. Loan loss provisions increased, and net interest margin and asset quality metrics like gross and net NPA ratios showed mixed results. 

Loan and deposit growth was solid, driven by SME, retail, and corporate segments, though there was a slight slowdown in some areas. The bank faces challenges but is also making strategic moves to enhance future performance.

Concall Highlights

• SBI’s Q3 FY24 saw a remarkable increase in net profit, reaching Rs 40,378 crores, up over 20% compared to the previous year.
• This growth was achieved despite accounting for a wage hike of Rs 12,718 crores during the fiscal year, which amounted to a 17% increase in wages.
• A notable exceptional item of Rs 7,100 crores impacted the reported profit, with the bulk of it attributed to addressing pension disparities among retired employees, which had been a long-standing issue.
• SBI’s focus on digital banking and analytics has been fruitful, with Rs 95,000 crores worth of business sourced through analytical leads, marking a 37% year-on-year growth.
• The bank’s asset quality has improved, with gross non-performing assets (NPAs) standing at 2.42% and net NPAs at 0.64%, both showing favourable changes compared to the previous year.
• Despite the wage hike, employee costs haven’t seen a significant rise yet due to proactive provisioning by the management.
• SBI remains confident in managing its capital adequacy ratio, believing that as long as net profit outpaces loan growth, it can reinvest profits. However, it remains open to raising funds from the market if needed.
• The bank anticipates a reduction in interest rates by the RBI starting from Q2 FY25 based on its internal assessment.
• Operating expenses saw an increase primarily due to a one-time staff expense related to pension and dearness allowance adjustments. The total staff cost for FY24 is estimated to be around Rs 84,000 crores, but is expected to decrease sharply to approximately Rs 66,000 crores in FY25.

Valuation and Outlook

State Bank of India, the largest public sector bank, reported unexpected results in Q3 FY24. While there was some growth in its net interest income, the net profit declined due to provisions for estimated pension liabilities. 

Despite seeing decent growth in fee and commission income, as well as cross-selling, it wasn’t enough to offset the provision expenses. Asset quality improved slightly with lower credit costs, but there’s a need for the bank to focus sharply on business growth amidst high interest rates and intense competition from private banks, regional banks, small finance banks, and NBFCs. 

The bank expects its Return on Equity (RoE) to exceed credit growth, leading to accretion in its CET 1 capital over the medium term. While management didn’t give specific projections for the next quarter, they generally anticipate a strong performance. 

However, given the current challenges in the banking sector, this expectation will be closely monitored. Despite this, the bank’s strong liability franchise, healthy asset quality, and minimal stress on deposit mobilisation keep our outlook positive.