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RETAIL BANKING | Staff Reporter, India

State Bank of India mired in asset quality woes

Sharp NIM compression, weak loan growth, and merger pains are to blame.

State Bank of India reported weak results with net earnings 30% below Maybank Kim Eng analysts' estimates. Asset quality deteriorated with high slippages of INR301b or 7% of loans.

Worryingly small ticket loans to SMEs and farm segments contributed to over 60% of slippages. Gross NPLs jumped to 10% from 7.4% last year. Sharp NIM compression of 50bps YoY to 2.4% was another negative. Analysts see continued pressure in FY18 as merger related pains impact earnings.

Here's more from Maybank Kim Eng:

A combination of factors led to the sharp deterioration in asset quality. Merger of five associate banks; pre-GST related anxiety amongst SMEs and farm loan waivers by certain states led to the poor show.

Corporate segment slippages were relatively lower at INR84b. However, watch list accounts of INR244b pose a risk to future stress. Our asset quality outlook is less sanguine than the management’s. We forecast credit cost of 2.7% for FY18 against management’s guidance of 2.25%.

The pace of NIM compression picked up and fell 50bps YoY to 2.4%. Roughly 60% of loans are benchmarked to the marginal cost of lending rate (MCLR), which witnessed downward repricing.

Yield on loans fell to 8.5% vs. 9.6% last year. Recent announcement of a cut in SA deposits rates to 3.5% from 4% attempts to cushionthe slide. Management guided  for a 10-15bps NIM expansion in FY18. We are less hopeful and see a 10bp decline. Loan book was flat as SBIN was engulfed in integration. 

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