New SBI Boss will Err... on the Side of Caution

Aggressive M&As to take back seat as Chaudhuri looks to set house in order

SANGITA MEHTA & SHAJI VIKRAMAN 
State Bank of India Chairman Pratip Chaudhuri's voluntary baptism by fire was the first step in his journey to make the 205-year-old behemoth reach the top 50 in global rankings without future earnings shocks. Prudence and caution will take precedence over aggression. Attention-grabbing takeovers and mergers, including those of associate banks, will be on the backburner as the nation's largest lender sets its house in order with higher provisions for bad loans and pension liabilities. 
Chaudhuri said investors will have to endure some pain in the upcoming quarters though not of the magnitude of the quarter to March, when SBI shocked investors and the market after reporting a net profit of a little over 20 crore—the lowest in a decade or so. "It will be slightly subdued for two more quarters as we have to make a provision of 550 crore each for provision coverage. " 
But the good part, according to him, are signals which indicate the bank's net interest margin (NIM)—a key gauge of profitability, is on an upward curve. " I see it coming back " he said in an interview to ET. 
SBI shares have lost a fifth of their value this year, compared with a 13% decline in the Sensex. India's largest bank is valued at $31 billion compared with Industrial and Commercial Bank of China valued at $249 billion. 
In the last quarter, SBI provided a record 2,300 crore for bad loans and wage revisions. The bank was also forced to draw down over 8,000 crore from its reserves to provide for pension liabilities. 
NIMs, which declined to 3.3% in the quarter to March, could widen to close to 3.5% as the impact of repricing of loans kicks in. SBI raised its interest rates by 75 basis points a few weeks ago after the RBI revised key policy rates in April. It has also raised deposit rates, mostly for shorter tenures. SBI, which under previous chairman OP Bhatt pursued an aggressive strategy to boost market share, will now focus on deposit mobilisation and lending. Rethink on Merger of Associate Banks 
"It will be back to basics," Chaudhuri said. He, however, said the management will not abandon its pursuit of market share. It is also amply clear that Chaudhuri has had a rethink on the merger of associate banks of SBI. He said there will be a pause on such mergers until July 2012. "Associate bank mergers are not going to happen in a hurry. 
It is not because we are not convinced that merger is the right thing, but it is because it requires capital and operational efficiency." The cost of a single merger of an associate bank with the parent would be Rs 1,500 crore in terms of payout on staff benefits. 
The new chairman, a career banker with SBI who took over from Bhatt this April, said an overhaul is underway in some of the subsidiaries controlled by the bank such as SBI Funds Management-—which is in the mutual fund business—besides SBI Cards and SBI Capital Markets—the investment banking arm of the bank. In his assessment, SBI Mutual Fund had hurt the bank's brand equity while the performance of its credit cards subsidiary, which has a partnership with GE Capital, was disappointing. 
SBI may have been rapped by the regulator for some of its lending to telecom companies, but Chaudhuri said all the firms the bank lent to were respected and none of the loans has been classified as a bad loan. 
"In telecom, the biggest asset is licence and it cannot be pledged as accounting standards do not allow such assets to be treated as fixed assets," he said.

Five Things that SBI Chairman Plans To DoCONTINUE TO pursue market share and profitabilityPOSITION SBI as one of the top 50 global banks 
OVERSEAS EXPANSION 
drive to focus on Australia MERGER OF associate banks on back burner TO DRIVE changes in subsidiaries to boost their performance 
"We are interested in growth only if it comes with profits" 
"When you are on an upward curve, you don't think that the downward trend will hit you" 
PRATIP CHAUDHURI 
SBI Chairman