The season's festive cheer has had a rub-off effect on banking stocks. Over the last three months, the Bank Nifty is up 13.3 per cent and the share price of the country's largest lender State Bank of India (SBI) has gained over 10 per cent. While most analysts say that the perception of the largest lender, which is a lead indicator for the entire sector, is turning positive, few are willing to stick their necks out and put a "buy" call on the stock. Upgrades too, haven't happened yet, even though the bank's management has been conveying that asset quality issues have peaked. Goldman Sachs says: "The management indicated that the worst is likely over regarding asset quality and that slippages should start to stabilise or fall. SBI expects net non-performing loans (NPL) of 2-2.25 per cent by FY13 vs 2.4 per cent in 2Q."
However, most other analysts believe the asset quality pain is likely to continue as other PSU banks are beginning to report similar NPA data as SBI's. The second quarter saw SBI add Rs 11,800 crore to its stressed asset portfolio, of which Rs 7,100 crore was fresh slippage (fresh accretion of bad loans in the quarter) and Rs 4,700 crore was restructured. The bank's outstanding restructured book is at Rs 40,454 crore while gross NPAs stand at Rs 49,202 crore. Saday Sinha of Kotak Securities says: "Asset quality stress on SME and mid-corporate book is a cause of concern. Although SBI is ahead of the industry in reporting bad loans, we remain cautious on the stock till the asset quality issue stabilises."
Asset quality pain is unlikely to abate over the next couple of quarters at least, as the bank's asset quality is directly linked to the performance of the economy. Till growth returns and companies turn profitable, the outlook on banks cannot change. Also, the bank has a substantial exposure to small and medium companies and Rs 14,389 crore of this book is stressed, which accounts for 7.9 per cent of gross advances.
The other issue is that growth continues to be a challenge. The bank is consciously not focusing on growing the mid-corporate book as the segment is already stressed and the large corporate is not borrowing. Slowing credit growth and high cost of deposits are already impacting net interest margins (NIMs), which saw a sequential decline of 23 basis points in Q2. The bank is unlikely to achieve a NIM of 3.75 per cent in FY13. A real turnaround will only happen when the economy starts growing at above 6.5 per cent and corporate profitability rebounds. Sinha says: "We are modelling NIM to come at 3.45 per cent during FY13 (vs 3.85 per cent in FY12), which is likely to keep NII growth muted for FY13 (4.1 per cent as per our expectations)."