State Bank of India has outperformed in Q3FY22 with growth in profits and stabilized asset quality. The largest public sector bank braved through the second wave of pandemic and seems to have emerged stronger after this quarter. With economic activity picking up and ‘Omicron’ less deadly than previous waves, the bank is set on executing its plans of improving asset quality, increasing loan disbursements and maintaining its double-digit RoE growth of 12% in FY22. 

The bank’s profit surged 62% YoY to Rs 8,431 crore while operating profit rose 7% to Rs 18,522 crore. This was aided by an increase in fee income to Rs 5,747 crore (up 7% YoY). The bank’s advances grew 8% to Rs 25.6 lakh crore, while deposits rose 9% YoY to 38.4 lakh crore. Asset quality improved as gross NPAs fell to 4.5% (vs 4.7% in Q3FY21). Retail loans continue to dominate the AUM mix with personal loans having maximum growth (29% YoY) in Q3FY22.

SBI’s net profits rise, though NII and NIMs fall

The rise in the bank’s net profit was helped by a 6% YoY increase in net interest income (NII) to Rs 30,687 crore. A 17% YoY fall in provisions to Rs 10,090 crore, also aided net profit growth.

The YoY rise in NII is because of a rise in fee income (7% YoY) to Rs 5,747 crore. Compared to peers, growth in fee income is healthy, but looking at the trend since Q3FY21, the bank has enough scope to grow considering its peers are clocking double-digit growth. ICICI Bank’s fee income grew 19% YoY, HDFC Bank grew 17% and Axis Bank’s fee income grew 15%.

A rise in interest expenses (3% YoY) to Rs 38,991 crore led to a sequential fall in NII. Net interest margin improved marginally by 3 bps YoY to 3.15%, but fell 9 bps sequentially. The QoQ decline is because of a decline in domestic NIMs by 10 bps to 3.4% and a fall in interest earnings on tax refund.

The company’s Q2FY22 NIMs included interest on tax refund as an additional benefit leading to NIMs rising 32 bps to 3.24%. The management was prepared for the drop in the percentage this quarter and hence does not count it as a hurdle in the growth.

SME loans grow, but retail continues to dominate the loan mix

According to a report by Kotak Securities, retail and SME loans will be the driving factors in loan growth as these loans are of small ticket size. For now, corporate loans are yet to see a rebound in terms of growth. However, SBI is planning to shift its focus to corporate loans to utilize its large reserves worth around Rs 2 lakh crore.

Looking at SBI’s AUM mix, maximum loans lie with the retail (42%) and corporate sectors (35%). Corporate loan AUM saw a marginal fall in growth by 1% YoY to Rs 7.83 lakh crore from Rs 7.88 lakh crore in Q3FY21. The management is also focused on growing the retail and SME segments as it sees robust demand, going into FY23. In Q3FY22, retail AUM grew 15% YoY to Rs 9.5 lakh crore while the SME segment grew 5% YoY to Rs 3.1 lakh crore.

In terms of loan mix, there was a slight increase in SME loans to 14% in Q3FY22 from 13% in Q2FY22 On a year-on-year basis though, the SME loan mix stayed the same. SME loans grew because of increased lending through ECLGS (Emergency Credit Line Guarantee Scheme) line. 

Home loans constitute 57% of the total retail mix. Home loan AUM stands at Rs 5.4 lakh crore in Q3FY22 with a growth of 11% YoY. According to a report by ICICI Securities, retail loan growth is mainly because of growth in home loans. Also with construction picking up, rising demand for new homes will lead to demand increasing for home loans. 

Xpress credit (personal loans for salaried employees) grew the highest by 29% YoY to Rs 2.28 lakh crore followed by personal gold loans growing by 26% YoY (Rs 22,063 crore). Xpress credit also saw an increase in the AUM mix to 24% in Q3FY22 from 21% in Q3FY21. An improvement in retail loans will help the bank improve its NII. 

Like its peers, even SBI saw a fall in auto loan disbursements. AUM for auto loans grew marginally by 2% YoY to Rs 77,437 crore. Auto loans in the AUM mix are also seeing a marginal decline from 9% in Q3FY21 to 8% in Q3FY22.

Asset quality improves but a mixed trend follows on a QoQ comparison

The asset quality of the bank is improving steadily as gross NPAs fell 27 bps YoY to 4.5%. This is because of adjusting bad loans write-offs worth Rs 4,200 crore. However, net NPAs increased 11 bps YoY to 1.34%. When compared sequentially gross and net NPAs fell 40 bps and 18 bps, respectively. The management needs to pay more attention on improving its asset quality on both YoY and QoQ trends.

When we look at segment-wise breakup for gross NPAs, the reason for total gross NPAs to fall becomes clearer. NPAs fell across all loan segments like corporate, retail, and SME for SBI. This is a positive trend indicating that the bank’s asset quality not just stabilized in Q3FY22 but also strengthened.

Operating profit increased 7% YoY to Rs 18,522 crore because of an increase in operating income by 3% to Rs 39,361 crore and a marginal increase in operating expense by 1% to Rs 20,839 crore. This is because of flat growth of operating income sequentially and a 2% QoQ fall in operating expenses to Rs 20,839 crore.

Overall, SBI’s loan growth looks robust. The management stays committed to delivering 15% RoE on a sustainable basis. Credit costs have subsequently reduced 11 bps YoY to 0.49% in Q3FY22. Analysts from Axis Direct and Motilal Oswal expect the bank’s credit cost to remain at these levels. Analysts from Axis Direct suggest that if credit costs remain at these levels, the bank’s commitment to delivering on double-digit RoE will sustain for longer periods.

The bank’s loan book is healthy. Its market share in home loans and auto loans is over 20%, indicating good consumer sentiment in these sectors for the bank to tap into. Retail loans will continue to grow and corporate loans might see an increase in demand as the bank plans to target demand in this segment as well.