SBI Q3 Preview: Net Profit Likely Lower Due to High Wage Bill, Anticipated Muted NII Growth

SBI’s Q3 preview suggests a potential 26% YoY decline in core operating profit, as projected by Nomura. Key areas to watch include comments on unsecured loan growth, capital adequacy, and the traction of the loan book. These factors will be crucial in assessing the bank’s performance for the third quarter.

SBI is expected to report muted earnings in the third quarter, primarily due to increased operating expenses resulting from wage revision and pension costs. The bank had earlier revised its wage growth assumption from 10% to 14% in the September quarter.

SBI is expected to report muted earnings in the third quarter, primarily due to increased operating expenses resulting from wage revision and pension costs. The bank had earlier revised its wage growth assumption from 10% to 14% in the September quarter.

Nomura India suggests that, after factoring in the impact of wage revision in the second half of FY24, the risk associated with wage settlements on SBI’s operating profitability will likely be mostly resolved for the time being.

The brokerage emphasized that the challenges faced by SBI underscore the risks associated with investing in public sector banks (PSU). Nomura predicts a substantial 26% year-on-year drop in SBI’s core operating profit for the third quarter, highlighting key areas to watch such as comments on unsecured loan growth, capital adequacy, and loan book performance. In the preceding quarter, SBI exhibited an 8% YoY growth, reaching Rs 14,330 crore, and witnessed over a 12% YoY increase in net interest income, totaling Rs 39,500 crore.

As of now, SBI’s shares have seen a modest 0.9% gain on the BSE for the year. It reached a record high of Rs 660 on December 20, 2023. The ongoing challenges, as noted by the brokerage, serve as a reminder of the inherent risks associated with investments in PSU banks.

Analysts from Nuvama anticipate healthy loan growth of 3% quarter-on-quarter (QoQ) for SBI in Q3. Net Interest Margin (NIM) is expected to experience a marginal decline by 4 basis points (bp) QoQ. SBI has indicated a shortfall of INR 100 billion due to a new wage agreement, to be spread over two quarters in H2FY24. In the previous quarter (Q2FY24), the bank had a one-off wage provision of Rs 3400 crore.

Given a high base, operating expenses (opex) for SBI are anticipated to grow less sharply compared to other state banks. Core Pre-Provision Operating Profit (PPOP), inclusive of catch-up wage provisions, is projected to grow 1% QoQ higher than other state banks, influenced by the elevated opex in Q2FY24.

Analysts expect slippages to increase to 0.8% from 0.6% QoQ, primarily due to the bank’s Rs 1250 crore funded exposure to BGR. Despite this, the total credit cost is anticipated to remain low at 23 basis points. It is noted that the bank may not need to provide for BGR since the account is deemed a paying one but has slipped for technical reasons.

Kotak: Analysts from Kotak expect a decline of around 7 basis points quarter-on-quarter (QoQ) and 19 basis points year-on-year (YoY) in net interest margin (NIM). Despite this, they foresee the potential for stable performance due to the structure of the loan book and minimal need for deposits to fund growth. Operating expenses are anticipated to be higher due to costs related to wage revision, including the impact of final settlement.

Axis Securities: According to Axis Securities, SBI is likely to experience healthy growth in advances and deposits. However, the growth in Net Interest Income (NII) is expected to be subdued, and NIMs may see a compression of 5-7 basis points. Pre-Provision Operating Profit (PPOP) is projected to decline due to costs associated with the wage revision. While credit costs are expected to remain benign, the asset quality is expected to continue its improvement trend.

Motilal Oswal: Motilal Oswal analysts anticipate higher Operating Expenses (OpEx) due to increased investment. They expect earnings to decline due to higher wage provisions. On a positive note, asset quality is expected to improve further, supported by a low-stressed asset pool. Margin and provisions are highlighted as key factors to monitor in assessing SBI’s performance.

StoxBox Analysis:

StoxBox expects State Bank of India (SBI) to deliver strong financial results in Q3FY24. While there may be a marginal decline in Net Interest Margins (NIMs) due to the ongoing high cost of funds for public sector banks (PSB), StoxBox anticipates significant absolute profitability growth in the mid-teen digits for the current quarter. This growth is attributed to the bank’s high disbursals of advances, supported by increased infrastructure spending.

The analysis notes that SBI holds a substantial share in salary accounts, and the Current Account Savings Account (CASA) and Certificate of Deposit (CD) ratio are expected to remain stable without showing signs of concern. The standout feature of the quarter’s results is predicted to be a significant growth in other income. This growth is attributed to SBI’s strategic focus on optimizing its extensive branch network of 22,405 for cross-selling opportunities. Overall, StoxBox appears optimistic about SBI’s performance in Q3FY24, emphasizing robust profitability and diversified income streams.

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