Is weak NIM merely a blip for SBI?

Amid higher cost of funds, as deposits got repriced, SBI’s NIM fell by 27 basis points (bps) sequentially to 3.3%. This was a negative surprise as the margin was expected to improve a bit due to the lagged repricing of MCLR linked loans. One basis point is one-hundredth of a percentage point. Jefferies India analysts noted that since December 2022, while ICICI Bank and HDFC Bank have raised 1-year MCLR by 45 bps, SBI has taken a lower hike of 25 bps probably to retain/gain market share. “While some of the recent hike (5 bps in past three months) may absorb cost pressure, we still lower our FY24 NIM forecast a bit to factor weaker margin trends," said Jefferies analysts in a report dated 4 August.

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However, it is encouraging that SBI expects 3.47% margin for FY24, likely aided by an improvement in yields and stable cost of deposits. Even as SBI continues to mobilize deposits, analysts said bulk of the deposits are repriced, leading to a stable cost of deposits. For FY24, SBI’s management has guided for 12-13% deposit growth and 14-15% growth in loans. Loan growth is likely to be led by retail business segments, including home loans, auto loans and unsecured loans. Loan growth is expected to be driven by both digital channels and branch expansion. SBI plans to add 300 branches in FY24. All this bodes well for SBI’s prospects.

“Repricing of assets and liabilities would continue for SBI in the coming quarters but it will not be much of a drag on the margin. That is because yields would improve even if the cost of funds increases. As such, we expect SBI’s NIM to improve from Q3FY24 onwards," said Kaitav Shah, BFSI research analyst, Anand Rathi Institutional Equities.

In Q1, SBI’s net interest income rose by 25% year-on-year to ₹38,905 crore, but was 4% lower sequentially owing to faster deposit growth of 2.4% versus loan growth of 1.1%. Lower provisions and strong growth from non-interest income meant net profit more than doubled year-on-year to ₹16,884 crore.

The bank continues to maintain stable asset quality metrics, which is a bonus. As on 30 June, gross non-performing assets (GNPA) and net NPA (NNPA) stood at 2.76% and 0.71%, respectively. Sequentially, SBI’s credit cost was stable at 0.32%. Slippages rose marginally versus Q4FY23, but analysts point out that it is more to do with seasonality and they expect this to normalise.

SBI’s cost-to-income ratio fell from 54.7% in Q4FY23 to 50.4% on the back operating efficiencies.

However, its focus on branch expansion and digital infrastructure may keep operating expenses at elevated levels. In this backdrop, investors would do well to monitor trends in the bank’s cost-to-income ratio, which would have a bearing on its earnings.

In the past one year, SBI’s shares have risen by 7.5%. Re-rating hereon will depend on its capability to deliver consistent growth. “For SBI, margin decline was more than what we had expected, and the business growth was also modest this quarter. While its return on assets and return on equity are expected to be healthy at 1% and 18.6%, respectively, for FY24E, the progression on margins over the coming quarters will be critical for stock performance," said Nitin Aggarwal, head-BFSI, institutional research, Motilal Oswal Financial Services.