State Bank of India’s (SBI) fourth quarter results resembled an oasis in a banking system ravaged by worsening asset quality and deteriorating profitability. The country’s largest lender reported a fall in fresh slippages, improving gross and net bad loan ratios, and an increase in loan upgrades and recoveries.

SBI’s gross bad loans as a percentage of its loan book improved to 6.9% as of March from 7.23% in December because fresh slippages fell to Rs9,755 crore from Rs10,185 crore. Its bad loan ratio on a net basis showed a bigger fall to 3.71% from 4.24% in the previous quarter. Of course, ratios are better than before simply because the bank was able to grow its loan book at 7.92%.

But the fall in slippages and the rise in recoveries and upgrades show that asset quality is surely on the mend.

During 2016-17, SBI recovered close to Rs12,000 crore of its bad loans, 22% higher than in the previous year.

In a nutshell, the lender is finally able to make its errant borrowers pay back their dues, its loan book is turning toxic at a slower pace and better rated firms are coming to the bank to borrow. Since SBI is responsible for nearly a quarter of the flow of bank credit to the economy, the lender’s improved numbers foretell a stronger recovery going ahead.

But would it be too soon to rejoice?

A sanguine lender typically goes easy on provisions. But provisions are what set SBI apart from the rest of the banking system. At 65.65%, the lender’s provision coverage ratio (PCR) is up five percentage points from a year ago and is second only to Bank of Baroda among peer lenders. SBI provided Rs10,993 crore against bad loans, 50% higher than in the previous quarter. It also has a countercyclical provisioning of Rs1,100 crore set aside for bad days. Further, it has provided Rs5,900 crore towards standard assets in stressed sectors, which is over and above the PCR.

In short, SBI is buying as much insurance as possible for the possibility of an increase in future slippages. The bank’s management, which has been forthright in guidance previously, was vague on future asset quality and loan growth. Put these two together and it makes for an uneasy forecast.

For SBI, the primary pain points are the burden of bad assets of the five associate banks it merged with itself in April. It will have to deal with a watchlist of Rs32,427 crore, dominated by the power sector, where resolution is slow. Further, the bad loan ratio of its large corporate loan book has increased and the needle on asset quality can move negatively if a large borrower slips.

What lies ahead for SBI and the economy at large is a bumpy road to recovery. For investors though, the stock that trades at a multiple of 1.3 times, its fiscal year 2017 earnings would look cheap.

The writer does not hold positions in the companies mentioned above.

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