SBI Net Slumps 99% on Bad Loans, Pensions

Amountain of bad loans and an army of pensioners played havoc with the net profit of the country's largest lender, State Bank of India, whose numbers foxed analysts and unnerved investors on Tuesday. Traders and shareholders stared at television screens in collective disbelief as SBI announced a 99% drop in net profit to 20.8 crore for the quarter ended March 31, 2011, a number that is one of the lowest among listed banks. 
But the decline in performance could have been less dramatic had the bank not followed a conservative accounting practice and made lumpy, one-off provisions to clean up its books—a familiar syndrome in government banks when a new chief announces the financial results. 
"These are one-off provisions, which will not appear in subsequent quarters," assured SBI Chairman Pratip Chaudhuri, who took charge on April 7. But he warned that loan growth could slip 2-3% and more bad loans could pile up, if the economy grows at a slower pace. 
Nonetheless, the bank announced a dividend of 30 a share, which did little to liven up the stock. On Tuesday, SBI shares fell 7.8% to close at 2,413. The profit shock came from extra provisioning of 3,200 crore on sticky loans—a slice of which had to be written off as losses—and a 2,473-crore blow on account of pension liability. Of the bad loan provisioning, 500 crore is against teaser loans—an attractive home loan scheme launched by former SBI chairman OP Bhatt to gain market share. Unlike other state-owned banks, SBI knocked off its reserves to provide for the remaining pension liability of more than 7,900 crore. The dip in reserves pulled down SBI's financial parameters like capital adequacy level and book value, which further rattled investors. 
"This was avoidable. The bank somehow wanted to frontload all expenses," said Parag Jariwala, analyst at brokerage Anand Rathi Securities. But he expects the bank's net interest margin (NIM)—the net interest income generated by a bank relative to its interest-earning assets like loans, investments and cash—to improve in the coming quarters as SBI reaps the benefit of higher interest on loans. While NIM rose to 3.32% from 2.66% a year ago, it fell from 3.6% clocked during the quarter ended December 31, 2010. "A 3.5% NIM is a feasible and possible proposition for thecurrent fiscal," Chaudhuri said. The bank's advances grew 20.32% in 2010-11 to 7,71,802 crore, and operating profit rose 17% to 6,080 crore ( 5,194 crore) on account of 20% higher net interest income at 8,058 crore. Analysts Retain Buy Call, Believe Bad Phase's Over 
As per RBI rules, SBI will have to make provision of . 1,100 crore as a counter-cyclical buffer and other provisions. 
SBI Managing Director and Chief Financial Officer Diwakar Gupta said, "If there is a slowdown, there will be an impact on asset quality in general. But we don't see the stress increasing further as the slippages from sectors other than agriculture is recoverable." On the . 7,900-crore pension provisioning, he said, "This was towards pension payment for employees who retired between 2007-12, so we needed to make this provision this year itself. We could not do this out of profit as otherwise the profit would have been negative."Analysts are maintaining a buy call on the stock as many of them belief that most of the bad news is out. Vaibhav Agrawal, an analyst with Angel Broking, said, " There were negative surprises even in the margin front and operating performances were not very encouraging too. But we have maintained a "buy" on SBI with a reduced target of . 2,800 as we feel the bottom line should benefit as interest rate rises."