Analysts have often said that investing in the SBI scrip is a proxy for investing in the Indian economy. If the economy does well, so the logic goes, the State Bank of India cannot help doing well and vice versa.

That logic seems to have lost some of its sheen with the unveiling of a fabulous 60 per cent rise in SBI's net profit, despite sluggish corporate growth. At first glance, it seems that the bank has had no difficulty in doing well, despite the slowdown.

How has this feat been achieved? After all, the bank's net domestic credit growth was only 6.2 per cent, and the percentage of net non-performing assets to net advances actually increased by 0.7 percentage points to 7.3 per cent.

Growth in low-yielding investments was high, with 90.7 per cent of investments being in government securities. "Other income" comprising fee-based non-interest income actually fell to Rs 2643.07 crore from Rs 2757.02 crore in the previous year. And yet, profits have been excellent.

Or have they? The increase in gross profit has been just 12.12 per cent, inspite of a 15.37 per cent increase in interest earned. And for the second half of 1996-97, gross profit at Rs 1690.72 crore was lower than the Rs 1697.12 crore notched up during the second half of 1995-96.

If the second halves are compared, the increase in net profit, too, is 14.5 per cent, far lower than the whole year's net profit growth of 60 per cent. So the picture, so far as the second half performance is concerned, is radically different from what it was in the first half.

We don't have to search far for the reasons. Compared to a 15.3 per cent increase in interest earned for the full year, growth in interest earned during the second half, compared to second half 1995-96, was only 7.8 per cent. Add to that the fact that "other income" was much lower, because rupee volatility was much higher in the second half of 1995-96, leading to forex gains.

Analysts also say that the NPA level increased to a certain extent due to the bank's withdrawal from the DICGC credit guarantee scheme. SBI has said that the NPA increase is mainly due to the slowdown in economic activity, particularly in the second half, which adversely affected the return flow of credit.

The most important factor, however, accounting for the difference between the gross and net profits, is the fact that the huge depreciation on investments which the bank had to provide in 1995-96 due to rising interest rates has been absent in 1996-97. That is also the reason why the 1996-97 first half results were so much better than the corresponding period of 1995-96, as the depreciation had been provided during the first half of 1995-96.

The first half of 1996-97 saw a 178 per cent jump in net profits and a 28 per cent increase in pre-provision profits. More tellingly, pre-provision profits during the first half of 1996-97 were Rs 1706.91 crore, compared to Rs 1690.72 crore in the second half, whereas the increase in pre-provision profits during the second half of 1995-96 over the first half that year was Rs 364.11 crore.

Analysts point out that one of the reasons for SBI doing well in 1996-97 was the fact that on a fortnightly average basis, average loans increased by around 13.5 per cent.

In other words, the effect of the rapid growth during the latter half of 1995-96 spilled over into 1996-97. What about the current year? The sluggish growth during the second half of 1996-97 will be reflected this year, and the combined effect of an immediate lowering of rates on advances, together with the lagged effect of the deposit rate fall will mean lower spreads.

However, non-food credit for the banking sector is increasing, and if this heralds a turnaround in the economy, this could lead to higher lending levels, probably during the second half. But 1996-97's massive increase in net profits will not be repeated, unless of course the windfall from the National Housing Bank buoys up the bottomline.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.