SBI eyes margin boost from rate hikes, but wary of consumption credit hit

At a time when banks are struggling to protect their margins, India’s largest lender, State Bank of India (SBI), sees room for further improvement. Any additional repo rate hike could potentially lift its net interest margin by 4-5 basis points (bps), chairman C.S. Setty said on Tuesday. The state-owned lender, however, cautioned that higher borrowing costs could temper consumption-led credit growth.

Speaking at the bank’s September quarter earnings press conference, Setty said government bond yields were already factoring in one more rate hike, suggesting that much of the likely rate movement was already priced in. He said any further increase in the repo rate, would, however, allow the bank to reprice its external benchmark-linked lending rate (EBLR) quicker, providing an additional boost to margins.

“We will still be aided by the EBLR 25 bps increase, what has happened. And in case if there is any further repo action, the EBLR portfolio will get repriced quickly. This will add maybe 4-5 bps,” he said.

For July-September, the bank’s net interest margin (NIM) rose by 8 bps from the previous quarter to 2.94%, with its domestic margins up 11 bps to 3.11%, supported by lower deposit costs and better yields on advances.

In the previous quarter, Setty had guided for the bank’s NIM to remain around 3% for FY27.

Last month, for the first time in nearly four years, the Reserve Bank of India’s Monetary Policy Committee increased the key repo rate by 25 bps to 5.50%, and changed its policy stance to “calibrated tightening” from “neutral”.

Setty clarified that SBI was not necessarily anticipating multiple rate hikes, and said the current bond yield movement appeared to have factored in one more rate increase.

At the Business Standard BFSI Summit last month, the chairman had indicated he expects RBI to hike rates by another 50 bps by December.

After the monetary policy review last month, RBI governor Sanjay Malhotra had indicated that rate cuts in the near term were off the table, and that the central bank’s next policy move could only be another rate hike or a pause, depending on the evolving economic conditions.

After the earnings announcement on Tuesday, Setty cautioned that if the policy rate was increased by a further 50 bps, the country’s consumption credit could get affected. Productive sectors, on the other hand, were unlikely to see any immediate impact from interest rate movements, the chairman said.

The chairman stuck to his credit growth guidance of 14-15% for FY27, with deposits seen growing at 10-11%.

For the September quarter, the bank’s gross advances rose nearly 18% year-on-year to ₹52.08 trillion, led by a strong domestic corporate book that rose 16%, followed by retail personal loans that were up 14.5% from a year ago. Deposits rose over 12% to ₹62.77 trillion.

Despite hardening short-term rates, Setty said the bank had no immediate compulsion to raise its interest rates on deposits. SBI had excess statutory liquidity ratio (SLR) of over ₹4 trillion as of 30 September, providing sufficient liquidity to support credit growth.

The bank mobilized around $10 billion through foreign currency non-resident bank or FCNR(B) deposits under the RBI’s dedicated window, equivalent to about ₹95,000 crore. Excluding the FCNR(B) contribution, deposit growth was around 10.5-10.6%, broadly in line with its guidance.

The bank’s standalone net profit rose over 14% year-on-year to ₹23,038 crore. Net interest income (NII) was up nearly 15% to ₹49,143 crore, while the total interest income increased more than 10% to ₹1.32 trillion.

The bank’s non-interest income, however, fell by 5% from a year ago to ₹19,066 crore. This includes a one-time gain of ₹7,288 crore from the stake sale in SBI Funds Management, while the year-ago figure included ₹4,593 crore from its stake sale in Yes Bank.

SBI’s lower-than-expected operating profit and treasury income battered its stock. The shares ended nearly 2% lower at ₹969.55 apiece in a session that saw the benchmark Nifty 50 rise 1.6%.

During the quarter, its operating profit rose 7.2% from a year ago to ₹34,226 crore. Its foreign exchange income fell by 50% year-on-year to ₹529 crore due to a rise in government bond yields.

Consumption watch

SBI said it is keeping a close watch on rural consumption amid concerns over a potentially stronger El Nino phenomenon that has led to droughts and a slowdown in rabi crop sowing.

While the chairman said one weak crop season was unlikely to materially affect the quality of the bank’s agricultural portfolio, he flagged rural consumption as an important monitorable. “What we have to watch out for is the rural consumption pattern… if the El Nino becomes serious and how rabi is going to play out,” he said.

SBI has so far not witnessed any broadbased stress in its loan book, including in unsecured personal loans, home loans and gold loans.

Asset quality remained strong, with its gross non-performing assets (NPA) ratio declining to 1.39% from 1.47% a quarter ago. Its net NPA ratio also improved to 0.36% from 0.38% in the previous quarter.

On corporate lending, the bank’s sanctioned corporate loan pipeline was at ₹7.8 trillion, compared with around ₹6 trillion in the June quarter. The chairman said the pipeline was continuously replenished, as some proposals moved into disbursement and fresh ones were added.

SBI also indicated a strong traction in acquisition financing, and said it was actively participating in several large transactions alongside foreign banking partners. “We are one of the domestic banks which has done the most in this space. We are partnering with a lot of foreign banks to handle all the big-ticket deals you read about. The pipeline is very strong in acquisition finance,” said Setty.