State Bank of India's return on assets may hit a four-year high this fiscal year on the back of improving interest income, driven by higher net interest margins and stable asset quality, the countrys largest bank told analysts, triggering a surge in its stock on Thursday.
In its post results meeting with analysts on Wednesday, the SBI management said it expects the banks return on assets (RoA) to improve to 0.4 per cent -0.5 per cent this fiscal and to 0.9 per cent - 1.0 per cent in 2020-21.
This would be the highest since 0.4 per cent RoA reported in the year ended March 2016.The rise in RoA would be driven by credit growth of around 10 per cent -12 per cent and higher net interest margins (NIMs) of 3.15 per cent -3.20 per cent , fee income growth of 15 per cent and an estimated slippage ratio of 2 per cent for the year ending March 2020, the management said.
It expects the slippage ratio to improve to 1.3 per cent by March 2021.The bank is targeting a pre-provisioning operating profit of 65,000 crore this fiscal, which it expects to increase further to 75,000 crore in fiscal 2021.
In case stress rises, the banks pre-provisioning profit could come down to 70,000 crore in fiscal 2021, which will depress the RoA at 0.75 per cent -0.85 per cent , it said.
That would be still much better than the 0 per cent recorded in fiscal ended March 2019 and negative RoA reported in fiscals 2017 and 2018.Among PSU banks, SBI remains the best play on the gradual recovery in the Indian economy with a healthy PCR (provision coverage ratio) of 81 per cent , robust capitalisation (Tier 1 of about 11.3 per cent ), a strong liability franchise, and an improvement in core operating profitability, Motilal Oswal analysts Nitin Aggarwal and Parth Gutka said in a note.
SBI shares rose 7.69 per cent to end at 312 on Thursday as investors cheered the possibility of improved profitability.However, some analysts are cautious due to uncertainty about the banks future asset quality.We expect good core PPoP (preprovision operating profit) and strong performance from subsidiaries.
Valuation is also not expensivehowever, we stay equal weight given asset quality uncertainty, Morgan Stanley Research analysts Sumeet Kariwala and Subramanian Iyer said in a note.In our view, NPA formation will remain high unless the economy rebounds sharply.
Coupled with the continued struggle for banks to recover old bad loans, this implies that credit costs stay high.
The other risk with SBI, being the largest state-owned bank, is that it is asked to help stressed borrowers, their report said.SBIs net profit for the second quarter ended September increased three times year on year to 3,011.73 crore despite the bank using all the gains from stake sale in its life insurance subsidiary for making provisions.
The banks gross NPAs stood at 7.2 per cent in September, down from 9.95 per cent a year earlier.