SBI Q2 profit rises 14.3% to Rs 23,038 crore, NII up 14.7%, NPAs fall; Rs 7,288 crore one-time gain helps

Total advances grew about 18% from a year earlier to Rs 51.54 lakh crore, and deposits rose 12.3% to Rs 62.78 lakh crore. That gap, with loans growing faster than deposits, is the main thing to watch in the bank's funding. Net interest income and loan growth are what the bank's lending business earned, while the headline profit also carries the gain from the stake sale.

Asset quality

The bank's gross non-performing assets were 1.39% of advances, down from 1.73% a year earlier and 1.47% in the June quarter. Net NPAs were 0.36%, down from 0.42% a year earlier and 0.38% in the previous quarter. The fall in provisions helped profit directly, since less money had to be set aside for bad loans, and the bank's asset quality is now among the strongest it has reported.

The one-time gain

About Rs 7,288 crore of the quarter's profit came from selling part of the bank's holding in SBI Funds Management, its mutual fund subsidiary, through the company's initial public offering and a pre-IPO placement. One report puts the stake sold at 6%, while others do not give a percentage. A separate sale of a 0.65% stake in the National Stock Exchange was booked under capital reserves and not through the profit and loss account. The bank's reported profit should therefore not be read as purely coming from its regular lending operations, as the analyses of the results point out. The 23.8% fall in other income, and the reports of a flat or weaker operating profit on one measure, show how much the quarter leans on the gain.

SBI Funds Management listed on 21 July at Rs 613.30 on the NSE, about 6.85% above its issue price of Rs 574. The offer was entirely a sale of existing shares, so the company received no proceeds, and it was subscribed 41.66 times. The issue was cut after pre-IPO sales: SBI sold 2.88 crore shares and Amundi India Holding sold 39.19 lakh shares in pre-IPO deals on 9 July, and the offer size was revised from about Rs 11,693 crore to about Rs 9,813 crore.

Chairman C.S. Setty said the bank is targeting credit growth of 14% to 15% and deposit growth of 10% to 11% this financial year, supported by surplus liquidity of Rs 3.5 lakh crore to Rs 4 lakh crore. He said the guidance is based on nominal GDP growth plus 2.5 to 3 percentage points, and that the bank could exceed it if demand stays strong, and that retail term deposit growth is around 13% to 14%. Asset quality measures improved too: the slippage ratio was 0.41% and the credit cost fell 17 basis points from a year earlier to 0.22%.

The previous quarter, to June, had a standalone profit of Rs 21,121 crore, up 10.2% from Rs 19,160 crore, and the September quarter's rise to Rs 23,038 crore is therefore a step up of about 9% from one quarter to the next, helped by the gain. Brokerages had expected net interest income of Rs 47,770 crore to Rs 48,959 crore, and the actual Rs 49,143 crore was above that range.

For the bank, the quarter shows steady lending growth, improving asset quality and a margin that is holding up. Credit growth of about 18% is well above the 14% to 15% the bank is guiding for the full year, and the margin recovered slightly from the previous quarter. For investors, the questions are how much of the profit will recur and whether deposits can keep up with loans. The gain of about Rs 7,288 crore is larger than the whole year-on-year increase in profit, which was about Rs 2,878 crore, so the headline growth depends on it.

The reports reviewed do not mention a dividend. Analysts will be looking at the next quarter to see whether operating profit holds up and whether the margin gains hold, since a profit that depends on selling stakes in subsidiaries can only be repeated while there are stakes left to sell.