When State Bank of India (SBI) announced its Q4FY21 results on May 21 (Friday), investors and analysts were taken aback. The stock of India’s largest commercial bank closed higher by a little over 4% as analysts and investors were still digesting the bank’s impressive 80.2% YoY rise in net profit in Q4 to Rs 6,451 crore. The stock touched a lifetime high today of Rs 432.90 on the National Stock Exchange.

The point to remember here is that in Q4FY20, the quarter we are comparing with for past performance, the bank’s subsidiary SBI Cards had gone public, so the net profit was inflated by an exceptional gain of around Rs 2,731 crore. That makes its current quarterly performance even more commendable. To add to this, there was an interest reversal of Rs 2,127 crore on accounts that were under moratorium in 2020, based on a Supreme Court order.

The stupendous rise in the bank’s quarterly profits was because of two main reasons—a 4.7% fall in interest expenses and a near 11% YoY fall in provisions in Q4. The fall in interest expenses was despite the company’s total deposits rising 13.6% YoY to Rs 36.81 lakh crore during the quarter, with a CASA (current and savings account) ratio of 46.13% (up 97 basis points YoY).

The bank’s key operating parameters were robust, and with adequate capital and provisions (including provisions for Covid-19 related stressed assets), SBI’s management was cautiously optimistic about taking on the second wave of bad loans due to the economic slowdown in FY22 caused by the pandemic.

But will the bank really be able to surmount the second wave? We look at the Q4FY21 and FY21 numbers to figure out whether this is possible.

Non-performing assets (NPA) at 13-year low with adequate provisions

Over the past three years, SBI focussed on improving its asset quality, and this has helped the bank bring down its net NPA ratio to a 13-year low of 1.50% at the end of March 2021. This is despite the company making extra provisions for accounts that are stressed due to the Covid-19 pandemic.

The bank’s net interest income for Q4FY21 rose 18.9% YoY to Rs 27,067 crore, helped by a 3.9% rise in interest income on loans. For the full year (FY21), net interest income was up 12.9% YoY to Rs 1,10,710 crore. But there was a fall in interest on loans, which slowed the pace of growth of NII for Q4FY21 and FY21. As a whole, operating profit rose by 5% YoY in FY21 to Rs 71,554 crore.

Leaving aside the stellar performance in Q4, SBI’s expenses have been rising over the past few quarters. The spike in operating expenses by 15.8% YoY in Q4FY21 was mainly due to an increase in salary costs due to payment of arrears to employees after a wage revision. At the end of FY21, the salary costs rose by nearly 36%. This led to a 114 basis points (bps) increase YoY in the bank’s cost-to-income ratio in FY21 to 53.6%.

The management says that the spike in salary costs was a one-off in Q4, and that as a whole salary costs will rise by around Rs 1,500 crore in a quarter. There was also a 22.4% YoY jump in overheads in Q4 due to a higher payment of deposit insurance premium (up 47.8% YoY) according to new rules (paid out in March and September).

The bank’s collection efficiency of around 95-96% before April lockdowns shows the quality of its loan book. This is despite the company’s retail loan book rising faster than its corporate loan book. At the end of March 2021, the retail loan book was at Rs 8.7 lakh crore (up 16.5% YoY) at 40% of the total loan book of SBI, while the corporate book fell 3.02% YoY to Rs Rs 8.2 lakh crore. 

The personal loan slippage ratio (new NPAs out of total standard assets during a year) was 0.47% in FY21, down from 0.70% a year ago. The NPA ratio for personal loans was just 0.80%. As a whole, the slippage ratio of the bank at 1.18% was among the best in the industry.

Future is uncertain, with the second Covid19 wave

SBI’s low-risk deposit base that it targets for retail loans, including its express loans book, allowed the bank to grow rapidly over the past couple of quarters. The low slippages for retail loans is mostly because of the nature of salary account customers (50% government employees, rest corporate).

The bank’s management doesn’t anticipate much stress on its corporate book, nor on the retail book. Even if the corporates get impacted due to the second wave of Covid-19 infections, the bank has adequate provision and its capital buffer is strong (Capital Adequacy Ratio of 13.74%). Also, nearly 41% of the corporate loans given is to PSUs and government departments.

The worry though is the hit that micro, small and medium enterprises (MSMEs) will take because of the economic impact of the pandemic. Another customer base that will be significantly impacted is the agriculture sector. The management expects most of the provisions for NPA to be made for MSMEs and agriculture sector companies.

Another red flag is the tepid growth in advances the larger industry saw in the quarter ended March 2021. Bank credit growth slowed to 5.6% for the industry compared to 6.4% a year ago in Q4. This is despite the Indian economy growing at nearly 1.6% after weak economic growth in the previous (Q3) and negative economic growth in Q2 and Q1FY21.

For now, the SBI stock is flying high, with Q4 results a positive surprise. But with many states extending lockdowns well into June 2021, the first quarter of FY22 will be very weak. This uncertainty is what led to the bank’s management avoiding any guidance to analysts. They wanted to wait for a few more weeks before they did so. Investors may be bullish on the stock right now, but there are enough signs that a strong performance in the June quarter is not a certainty.