The Hindu Business Line : SBI: Impressive performance despite the gloss

Chennai, July 28 SBI’s performance looks spectacular, although the gloss has much to do with a relatively poorer performance a year ago. At that time (quarter ended June 2006), profits had dipped 35 per cent to Rs 799 crore due in part to a drop in treasury income and the presence of a tax refund in the earlier year).

On the average most banks have reported a 35 per cent growth in profits this quarter, riding on the back of a fairly consistent increase in interest income.

Four years of 30 per cent growth in loans has provided volume and a certain amount of stability to interest income. Other income too has grown for most banks, without relying excessively on the gains made by selling government securities.

Even factoring the effect of extraordinary items, SBI’s performance has been impressive. The bank had provided a surprisingly good performance in the immediately preceding quarter also.

It was expected that net interest margins would be under pressure given the higher cost at which banks raised deposits during the last one year. Banks paid about 2.5 to 3 percentage points more in interest than what they did 18 months ago.

The impact of higher costs paid to mop up resources was seen in the relative fall in SBI’s low cost deposits (savings and current accounts) by 1.5 percentage points to about 41 per cent of total deposits. Yet SBI has been able to maintain its net interest margins at 3.3 per cent as it got a better yield on loans.

Most banks have preserved their margins in this quarter implying an ability to pass on the higher costs to their borrowers. SBI’s increasing focus on mid-corporates (those with turnover of between Rs 25 crore to Rs 350 crore), which account for about 25 per cent of its loan portfolio, has probably helped the bank dictate prices. This segment of the market is probably a bit more accommodative in yielding higher charges, than the top rated companies who can source money directly.

The non-performing assets (NPA) figure for SBI was keenly awaited given the management’s acknowledgement that there was a problem of increasing defaults in housing loans. But both gross and net NPA figures were down this quarter lending confidence to the assumption that the problem is not yet alarming.

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