State Bank of India Earnings Call Nuggets: Jump in Loan Processing Charges and Outlook on Net Interest Margins

State Bank of India (SBIN.NS) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Jump in Loan Processing Charges

Jaiprakash Toshniwal – IndiaFirst Life Insurance: Sir, this is a question on other income side, we have seen a sharp ‘jump’ in loan processing charges as well as commission on LC and BG, so something to read here on it and other things, are the sanctions are improving for the Bank?

Pratip Chaudhuri – Chairman: We would then like to see a higher growth in the loan processing, but yes, the loan processing income which has pleasantly surprised us in the overall scenario of lower demand for Corporate Loan, but it is good that we could do it even in terms of – even in the days of, especially lower offtake up?

Jaiprakash Toshniwal – IndiaFirst Life Insurance: So are you seeing an improvement in the sanctioning going out for the general industry turnover or for your Bank per se?

Pratip Chaudhuri – Chairman: For our Bank per se, yes, but many of them, but there are very few projects that are coming up for new loans. Notable among them is a Tata Steel project of about loan component being INR80 billion, INR8,000 crores, so we got a good share in that and Hindalco, as much of the other is happening through refinancing of existing loans.

Jaiprakash Toshniwal – IndiaFirst Life Insurance: So, my second question on deposit and loan to deposit ratio, we are on a very high level and traditionally we are lower deposit trend than the other PSU banks, but the kind of deposit growth which we are seeing in the industry, do you think we can sustain at these rates and garner the deposit, or are we going to increasing the rates competitively?

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Pratip Chaudhuri – Chairman: I’ll ask my colleague Mr. Krishna Kumar, because the entire deposit resin has been on the basis of retail. So I would request him to tell what are the things they have done.

A. Krishna Kumar – MD, Group Executive, National Banking Group: Growth in deposits is mostly coming in from what, the chairman mentioned, what is called the Savings Bank segment, the low-cost deposit segment has grown in nine months by about INR50,000 crores at an annualized growth rate of about 19% in the last nine months on saving banks alone. Now the reasons has happened is, one, we have made the savings bank product quite simple. In the sense, we have removed any concept or notion of the minimum balance and charges thereon or not having a minimum balance. So that in itself has added a lot of value to this product, number one. Number two, we have also positioned a very simple add-on insurance product, an accident insurance product with the savings bank account, that itself has seen many people opening accounts for the insurance. So that has also given additional traction to the growth in savings bank. Then, in the last, in fact, year-to-date about 9.5 months to date, 10.5 months to date, we have expanded our branch network by 501 branches and still there is more to come by the end of March. Now, most of these or a 50% of these branches at least would be in the rural and semi-urban space and that would be where my savings bank account growth is coming from in any event. It’s 50% of my growth is coming from a rural and semi-urban and we’re expanding our branches – branch network in that segment as well. So I personally feel that in the savings bank component especially, we would continue to see the rate of growth of at least around 19%, 20% during the year ends, so that we know, let’s say, shortfall in the deposit mobilization machinery.

Jaiprakash Toshniwal – IndiaFirst Life Insurance: So is it fair to assume that State Bank won’t be that much aggressive on the raising deposit rates for the deposit the growth per se?

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Pratip Chaudhuri – Chairman: We have not. In fact, our peak deposit rate is 8.5%, whereas most of the other banks are at 8.75% and 9%, but we have seen some flight of deposit to the tax saving instruments and others because there is a difficulty that we can’t take it below 8.5% because as I said our main competition comes in the rural and semi-urban space from post office, the government saving scheme, which are at 8.5%. So as I said that we have not been unnecessarily aggressive, our rates are low, but at the same time we have to keep in mind the competition that is coming from other banks and alternative instruments. So we’ll be slightly lower in the deposit pricing, but we cannot afford to be too low, but we’ll not be unnecessarily aggressive in deposit pricing.

Jaiprakash Toshniwal – IndiaFirst Life Insurance: Fair enough. So if I have further question, I’ll come back in queue.

Pratip Chaudhuri – Chairman: Okay, and another couple of things that they can mention for the general interests, we have significantly upgraded our distribution. It may not matter in other places, but each of our 14,500 branches today are air-conditioned and have been provided with very nice furniture and decor, which has helped. Secondly, we’ve positioned the product called Accident Insurance, for INR100 a year, the person can get himself insured or has self-insured for INR4 lac, INR400,000, and per day the run rate was running at about 60,000, 70,000, it has now gone to 160,000. So this is the kind of success we are getting. Anecdotally, even when we have positioned our branches next to the very good private sector bank, we’ve seen a lot of shift because many people are worried about not maintaining the very stiff minimum balance and being slammed with debt charges. So we are playing on this theme that we don’t have any minimum balance charges and it seems to be working well.

Outlook on Net Interest Margins

Sandeep Nanda – Bharti AXA: I wanted to get your outlook on net interest margins, and also I wanted to understand, your loan yield is very close to your base rate. Why is that?

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Pratip Chaudhuri – Chairman: Yeah. The net interest margin was at 3.72% as an aggregate and even in the January the number is 3.72%. We expect the same trend to continue because in this quarter, particularly from February, we expected relief and we are seeing a relief on account of lower end of the cash reserve ratio. Further, we have INR200,000 crores, INR2 lac crores of SLR securities where the average yield is 7.3%. Now as these securities come up for redemption, the new securities that are coming in are minimum of 7.9% going up to 8.2%. So every INR100 of additional securities, we get a yield pickup of about 50 basis points. But regarding your point of the yield coming at 10 point – the yield is (now at) 10.70% whereas the base rate is 9.70%. So one reason is that we have a preponderance of large corporate accounts, which typically pay you less, but in terms of asset quality they have lower what is called a probability of default. Also, the earnings could be lower because we have a relatively high, what, 5.5 gross NPA ratio and relatively similarly 2.5 net NPA ratio. But, again, on the yield side, we will rather live with lower yields but not higher – raise the risk. Net-net, I think even at 10.75%, we are benefiting because our cost of funds is low. So we’re able to keep the whole environment low and still maintain a net interest margin of 3.72% which to my mind if not the highest, it is certainly the second highest in the country.