Even as the public sector lender outperformed the industry owing to the spectacular credit growth and low credit cost, the bank may be under pressure to lend more liberally in the coming quarters which falls into an election year.
State Bank of India announced a spectacular set of results in the second quarter, with a 74 percent growth in its net profit built on a 20 percent rise in loan growth and margins expanding by 30 basis points to 3.3 percent. The icing on the cake was a ROA ( return on assets ) of 1 percent, not seen since the stock listed; which in turn was made possible by a decadal low credit cost of just 27 bps.
Recommended ArticlesView All
Decoding multi-year health insurance policy — What is it and what are key benefits?
IST3 Min(s) Read
View | Pakistan Election: Will Imran Khan's changed tack from long march to resignations to snap poll work?
IST5 Min(s) Read
View | G20 Presidency: India can shape global Web3 narrative
IST6 Min(s) Read
The big question now is can the public sector lender sustain this performance. The credit cost of 27 bps is clearly tough to sustain. Nearly five years of cleaning up of bank balance sheets and provisioning, and austere lending in a Covid-crippled economy has brought down the credit cost. With credit growth in the mid-teens, and more unsecured loans a more normalised rise in loan defaults should be expected, which will push up credit costs a bit.
Margins could remain elevated, even rise a tad, in the second half of the current year, given that the chairman said the bank still has 3.5 trillion rupees in investments which can be encashed if loan demand rises. But thereafter, the bank will have to start raising deposit rates to find the money for new loans. Margins will hence likely start to get compressed, or at least stop rising in FY 24.
Loan growth can remain in the mid-teens, as the economy is in recovery mode, but a further rise beyond 16 percent will depend on the macro economy. At present, Indian exports are plateauing because of the recession fears in Western destination countries and in China. Pick-up in the capex cycle is still a hope. Renewable power apart, the rest of the loan demand is still for brownfield expansions in steel, paints and cement. There have been no greenfield expansion announcements.
Retail loan demand is holding up, but as infotech companies dial down pay hikes, and capital expansions remain restrained, retail loan demand can also plateau. The consensus view on India's GDP growth is 6 percent for FY24. (RBI stands at 6.2 percent, IMF at 6.1 percent and many well-regarded brokerages at 5.8-5.8 percent). For a GDP growth of 6 percent, loan growth beyond 15-16 percent is not possible. SBIs best quarter may be the current one. Then some plateauing is to be expected.
A bigger fear is that next year being an election year, the bank may be under pressure to lend more liberally. One hopes the exuberant lending of 2009 to 2012 doesn't return backed by all round self- congratulations about India being the only story in town.