SBI reported a 7% drop in net profit year on year, owing to a significant drop in the market value of the bank’s government bond investments as yields rose during the quarter.
Net profit fell to Rs. 6,068 crore in the quarter ended June 2022, down from Rs. 6,504 crore the previous year, as the bank recorded a Rs 6,549 crore loss on its investments due to value depreciation during the quarter. As a result, other income, which includes fee income, earnings from foreign exchange and derivative transactions, and profit or loss on investment sale or revaluation, fell by 80% to Rs 2312 crore from Rs 11,803 crore the previous year.
According to Chairman Dinesh Khara, the losses were marked to market (MTM) and booked when the benchmark ten-year bond reached 7.45 percent during the quarter, but because yields have since fallen, the bank does not need to recognise any more losses and may have to report gains in the current quarter. “If the 10-year yield remains at around 7.30 percent, we will be able to write off Rs 1900 crore.” If it rises to 7.75 percent, we may have to make additional provisions of Rs 2000 crore to Rs 3000 crore.
However, with inflation on the decline and the currency strengthening, we do not anticipate a sharp increase in yields,” Khara said.
Fears that rising inflation will force the Reserve Bank of India (RBI) to raise interest rates pushed the 10-year bond yield to 7.50 percent in June, the highest in more than three years.
It has since been reduced to 7.30 percent. On Friday, the RBI raised its benchmark repo rate for the third time in four months, reiterating its commitment to keeping inflation below its 6 percent target. The large investment losses overshadowed an otherwise strong performance, with loan growth of 15% driven by a 19% increase in retail loans and an 11% increase in corporate loans.
Core operating profit increased by 14 percent to Rs. 19,302 crore after excluding trading income and MTM losses. Net interest income (NII), defined as the difference between interest earned on loans and interest paid on deposits, increased by 13%, while net interest margins on domestic loans improved by 8 basis points to 3.23 percent. A basis point is equal to 0.01 percentage point.
Khara stated that the bank is confident of maintaining a 15% loan growth this fiscal year due to strong retail and corporate loan demand.
“We see no obstacles to loan growth.” Retail loan growth remains strong, with a 49 percent underutilization in working capital loans and a 26 percent underutilization of limits totaling more than Rs 5 lakh crore.
Retail is expanding, and capacity utilisation has increased to 75%, with many companies returning to banks to borrow from the securities markets,” Khara said, adding that loan demand is coming from sectors such as power, roads, ports, petroleum, and aviation.