InvestorQ : Why did SBI report such huge fall in profits in Q1FY23 and how did analysts get it so wrong?
Deepa Salunkhe made post

Why did SBI report such huge fall in profits in Q1FY23 and how did analysts get it so wrong?

Arya Nanda answered.
2 months ago

Interestingly, the net profit reported by SBI for the June 2022 quarter was Rs6,068 crore as compared to the consensus estimates of Bloomberg at around Rs8,394 crore. That is off the mark by nearly 27.6%. One of the main reason for this huge fall in profit was the MTM loss that the bank wrote off in the quarter amidts rising bond yields. Between May 2022 and the August policy, repo rates are up by 140 basis points. That has already resulted in a lot of front ending in the form of bond yields goin up to 7.3%. But, how does that matter?

The rise in the bond yields was large enough to warrant MTM write-off. The bond yields and the prices are inversely related. When the bond yields go up, the prices of the bonds come down and the holders are forced to write off such amounts. In the case of SBI, it already had a massive bond portfolio and so the losses were quite acute to the tune of nearly Rs6,459 crore for the quarter. That led to a sharp fall in the other income and compressed profits by 7% on a yoy basis and by 33% on a sequential basis. But how did analysts get it so wrong?

The estimates were not just wrong, but they were awfully wrong in the case of SBI quarterly results for the June 2022 quarter. The Bloomberg estimates had pegged the consensus forecast of SBi profits at Rs8,394 crore while the Moneycontrol consensus estimtes had pegged the profits of SBI in Q1FY23 at around Rs7,496 crore. Both were just too optimistic and awfully wrong. Ironically, the analysts were actually pegging an aggressive growth in net profits of close to 10%.

Why does it sound strange. Let me explain. It is no rocket science to realize that in a quarter when there has been such a sharp spike in bond yields, bond portfolio depreciation is inevitable. Most of the other banks had already taken a big hit on their profits due to such provisiosn and there wsa no reason to believe that SBI with its mega bond portfolio would be any different. SBI results are otherwise good in terms of higher loan growth, better NIMs, higher NIIs and lower gross NPAs. Even spillovers were much lower.

That brings us to a more fundamental question. It is hard to fathom what is meant by the company missed street estimates. It looks like the company is being benchmarked based on whether it can agree with the analysts. It should be the other way round. The analysts must use their judgement and their extrapolation skills to arrive at a number that reasonably reflrects the truth. Projecting profits that are 27% away is like throwing darts. You almost have the same chance of getting it right like you were doing it blindfolded.

Is it not time for greater accountability on the part of the analysts. Let me explain. The regulator needs to put a lot more accountability on analysts. For instance, in case the estimates of profits go wrong by more than 10%, the regulator can ask the analyst to explain why the difference arose. This would force greater discipline on the analysts and also greater transparency on the methodology followed. That would put greater accountability on the job and also make the analyst projections more meaningful to investors.