CALCUTTA, Jan 28: Strains of a slower economy will show up in the second half results of SBI raising the NPA level and increasing provisions for bad loans. In addition, ``election disruptions should limit loan growth to 7-8 per cent at best'', claims the latest research report of UBS Global Research.The report states that despite the underperformance of the SBI scrip following the drop in its operating profits in the first half to September 30, 1997, ``there is further downside until 1997-98 results are fully factored in.'' Quoting the management, the report says SBI's spread has dropped from 4.01 per cent to 3.43 per cent, a sharper fall than at other banks. This is largely because SBI has the highest proportion of fixed rate deposits and its spreads are more sensitive to interest rate movements, a higher proportion of blue chip clients where pricing competition has increased, a relatively high loan-deposit ratio compared with other listed banks and its spreads peaked in 1997-98, providing a high base forcomparison.
``We believe the pressure on spreads has been largely played out, and further erosion will be limited. Spreads are only likely to recover if interest rates turn around; however, we do not anticipate any turnaround in rates in the medium term,'' the report observes. It adds that the second half is likely to present a ``strikingly different picture, with SBI aggressively booking profit to make up these losses.''
SBI's valuations, the report maintains, have been affected by the regional currency turmoil. The direct forex exposure of the Indian banks is limited.
The upside of the currency turmoil will, however, be in the area of forex transaction fees.
SBI scrip has underperformed in the last six months, coming off sharply in the build up to, and immediately after, the half-yearly results. Although the stock has bounced back 13 per cent last month, it has underperformed the market almost 35 per cent since July, 1997.
SBI continues to trade at a premium to the banking sector even at a 30 percent discount level to the market. UBS cautions that its ``sensitivity to low interest rates, potential asset quality problems, below-average asset build-up and excess liquidity situation leaves it poorly placed in the current banking environment.''
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
