State Bank of India aims to protect its margins even as it expects to pay higher rates on deposits in response to market competition.
India's biggest lender by assets reported that its net interest margin for the fiscal third quarter ended Dec. 31, 2022, rose to 3.69% from 3.40% in the prior-year quarter. This helped the bank report its highest-ever quarterly net profit of 142.05 billion rupees for the period, an increase of 68.5% year over year. The bank's fiscal third-quarter net profit figure beat the S&P Capital IQ consensus GAAP estimate of 133.57 billion rupees.
"[State Bank of India] will be able to maintain its earnings trajectory and NIMs," Pritesh Bumb, senior research analyst at DAM Capital Advisors told S&P Global Market Intelligence in an email.
Bank credit in India is likely to keep growing at a fast clip as the government focuses on boosting economic growth. Finance Minister Nirmala Sitharaman announced a 33% increase in the government's capital expenditure for the fiscal year starting April 1 in the budget presented to Parliament Feb. 1. Loans were up 16.5% year over year as of Jan. 13, according to central bank data.
The International Monetary Fund expects India's gross domestic product to expand 6.1% in 2023, the fastest among major global economies. In contrast, world GDP is projected to grow by 2.9% in 2023.
State Bank of India said it will seek to mitigate risks from rapid credit growth and higher interest rates.
Long-term strategy
"While we'll continue to pursue growth in core operating income, we have also been proactive in identifying any potential risk and build adequate provisions for the same," Dinesh Khara, the bank's chairman, said on a Feb. 3 earnings call after announcing the results. "And, our operating results for the quarter are aligned with our long-term strategy."
With deposit rates going up in the industry, State Bank of India is also offering higher rates to depositors. Still, Khara does not expect this to pressure margins. "In the buckets where we feel that we can attract retail deposits, we are ensuring that we must be in line with the market trends," the chairman said. Khara added that given the bank has one of the the lowest credit deposit ratios, it will calibrate interest rates depending upon the need.
State Bank of India continues to outpace the system credit growth at 19% year over year, led by retail and small- and medium-scale enterprises, Emkay Global Financial Services said in a note after the release of the earnings. Deposit growth, however, has lagged, it added.
The bank's deposit cost will start catching up as term deposits usually have a maturity of one to three years, DAM Capital's Bumb said.
"On [the] asset side we have seen material pass-on already for the fair share of [the bank's] loan book. The bank does have margin mitigation tools but that will depend on competitive intensity next year as loan growth base will be also high," Bumb said. "We don't see any large near-term risks except if [State Bank of India] steps up its deposit accretion, leading to higher cost of funds and thus pressure on margins."
