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SBI: Provisions pull down profits - Views on News from Equitymaster
 
 
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  • Jul 30, 1999

    SBI: Provisions pull down profits

    State Bank of India (SBI) has recorded a total income of Rs 59.1 bn (up 19% YoY) and a net profit of Rs 3.48 bn (down 18% YoY) for the quarter ending 30th June 1999.

    SBI (FY99 Total Income Rs 19.11 bn) is India's largest bank. It runs the world's largest network of 8,900 branches and controls about 22% of India's loans and deposits.

    While total expenditure rose by 22.2%, total income registered a gain of only 19%, resulting in deteriorating margins. However, the Bank was able to improve its advance to deposit ratio during the period under consideration.

    The fall in the bottomline is mainly due to four reasons:

    • Increase in provisions for non performing assets at Rs 2.8 bn (up 37%)
    • Provision of salary revision arrears at Rs 733 mn (NIL)
    • Provision for the Magnum Triple Plus Mutual Fund Scheme Rs 310 mn (NIL)
    • Exchange Loss on the Resurgent India Bonds (RIB) Rs 850 mn (NIL)

    The increase in provisions for non performing assets has been precipitated by the dull economic conditions and the stricter guidelines imposed by the RBI over the years. The provision for salary increase arrears is not of much concern and it is likely that it appears time and again in the profit and loss statement.

    Sebi's ruling that the parent banks make good the shortfall in the assured returns to mutual fund unit holders has led to SBI making provisions for its Magnum Triple Plus scheme. However, as the SBI does not have any other assured return scheme in its offerings, this provisioning is a one-time expense for the company.

    The most important concern pertains to the provisioning for exchange loss on the RIBs because the rupee is likely to depreciate against the US Dollar for the next few years. This implies that the bank will have to continue making provisions for such loss, thus pulling down its profitability, till the time the RIBs are redeemed. However, the bank is protected against depreciation losses beyond a certain extent, by the Government of India

    The Indian banking industry is becoming intensely competitive with the entry of Indian private and multinational banks. SBI would have to adopt the latest in banking technologies to deliver the kind of services to customers as its international peers, in the absence of which there is a fear that it might lose more market share. Although SBI has taken some steps in this direction, it still has a long way to go. Moreover, the bank would have to become more efficient in its operations to become internationally competitive, especially after the large-scale deregulation in the Indian banking industry.

    Market View:
    The stock has been rated as a 'BUY' mainly on account of its strong retail network and the initiatives shown by the management in making the bank more efficient.

     

     

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