MUMBAI: State Bank of India Chairman Pratip Chaudhuri's voluntary baptism by fire was the first step in his journey to make the 205-year-old behemoth enter the top-50 in global rankings without future earnings shocks. Prudence and caution will take precedence over aggression and innovation.
Mergers and acquisitions, including those of associate banks, will be on the back burner as the nation's largest lender sets its house in order with higher provisions to smoothen out bumps in the form of bad loans and pension liabilities.
Chaudhuri said investors may still have to endure some more pain in the upcoming quarters though not of the magnitude of the quarter to March, when SBI reported a net profit of a little over Rs 20 crore.
"It will be slightly subdued for two more quarters as we have to make a provision of Rs 550 crore each for provision coverage." The good part, he says, is signals which indicate that the bank's net interest margin, a key gauge of efficiency, is on an upward curve. "I see it coming back," he told ET in an interview.
In the last quarter, SBI reported a 99% drop in net profit to Rs 20 crore while making record provisions of Rs 2,300 crore for bad loans and wage revisions. The bank was also forced to draw down over Rs 9,000 crore from its reserves to provide for huge pension liabilities.
Net interest margins (NIMs), which declined to 3.3% in the quarter to March, could widen to close to 3.5% as the impact of repricing of loans kicks in. SBI raised interest rates by 75 basis points a few weeks ago after the RBI revised key policy rates in April. It has also raised deposit rates, but mostly for shorter tenures.
SBI, which under previous chairman OP Bhatt pursued an aggressive strategy to boost market share, will now focus on deposit mobilisation and stepping up lending activity. "It will be back to basics," he said. Chaudhuri, however, said the management will not abandon its pursuit of market share. "It is easy to build market share by paying an outrageous price, but we will not choose the easy way," he said.
It is also amply clear that Chaudhuri has had a rethink on the strategy relating to the merger of associate banks of the SBI. He said there will be a pause on such mergers until July 2012.
"It is very much on the table but associate bank mergers are not going to happen in a hurry. It is not because we are not convinced that merger is the right thing, but it is because it requires capital and operational efficiency." The cost of a single merger of an associate bank with the parent would be Rs 1,500 crore in terms of payout on staff benefits.
The new chairman, a career banker with SBI and who took over from Bhatt in early April this year, has indicated that an overhaul is underway in some of the subsidiaries controlled by the bank such asSBI Funds Management, which is in the mutual fund business besidesSBI Cards and SBI Capital Markets, the investment banking arm of the bank.
What worries him is the fact that these subsidiaries have underperformed considering the pole position of SBI in the banking sector and a strong brand image. In his assessment, SBI Mutual Fundhad drained the bank's brand equity while the performance of its credit cards subsidiary which has a partnership with GE Capital was disappointing.
SBI may have been rapped by the regulator for some of its lending to telecom companies but Chaudhuri said that all the firms that the bank lend to were respected and none of the loans which have been disbursed has been classified as a bad loan.
"In telecom, the biggest asset is licence and licence cannot be pledged as accounting standards do not allow such assets to be treated as fixed assets. I have not come across any compromise," he said.
Chaudhuri however did concede that in some cases where SBI was the sole banker, there was a dilution in standards. The slippage was more in the conduct of the account rather than in sanctions, he said. The SBI chairman is confident that the Reserve Bank of India will re-assign the top-notch internal rating for his bank which was lowered by a notch by the regulator earlier last fiscal now that the lender has addressed some of the deficiencies pointed out earlier by the RBI.
According to Chaudhuri, the bank will also review its overseas acquisition strategy. SBI has now come around to the view that an earlier plan to buy out a bank in Indonesia can be jettisoned considering that the country's top lender has a presence there and the realisation that it does not make sense to pay a premium to acquire the bank there.
Instead, Chaudhuri said that SBI will now target Australia as the market to drive overseas growth. In terms of the growing number of Indian immigrants and the quality of such immigrants, the bank reckons that Australia will be an important business destination. The other compelling reason for expanding in Australia is the ease of entry. Australia allows banks to have a dual presence, in other words operate both as a branch and a subsidiary.
The management is also confident that capital raising for the bank during this fiscal would not pose problems although there are reports that the government which controls over 58% of the bank's capital may find it difficult to fund it given the need to keep a leash on spending to ensure that the fiscal deficit is under control. The capital raising will have to come partly from retained earnings and partly from the proposed rights offering, he said.
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