State Bank of India Q3 may see wage revision provisioning; what Nomura India says on PSU bank shares

State Bank of India Ltd (SBI) could be hit by wage revisions-related one-offs in the second half of the ongoing financial year after PSU banks agreed to a wage revision increment of 17 per cent on a salary base of FY22 for officers and workmen in banks. SBI had revised its wage growth assumption to 14 per cent from 10 per cent in the September quarter itself. After factoring in the wage revision impact in H2FY24, Nomura India said the risk of wage settlements on operating profitability will largely be behind for SBI for the time being. That said, the brokerage felt that "this issue only serves to highlight the risks associated with investing in PSU banks, in our view."

For now, the brokerage has maintained its share price target of Rs 665 on SBI. The stock has delivered nil return in 2023 so far. It is flat for the one-year period. The wage revision would be effective from November 2022 and lenders would make retrospective adjustments to their wage bills in wage provisioning.

The SBI management had in the September quarter suggested that every 1 per cent rise in wage revision assumptions leads to an increase of Rs 100 crore in the monthly wage bill for the largest state-run bank. Nomura India, however, believes the sensitivity could actually be in the range of Rs 50-100 crore per month.

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Nomura India noted that due to the increase in wage growth assumptions, SBI had to incur a one-time impact of Rs 3,400 crore in Q2 accounting for the retrospective provisioning (from November 2022) taken in Q2.

"In 2Q, as a result, SBI had reported a 16 per cent YoY drop in core pre-provision operating profit.

"The wage revision impact had also resulted in an extra Rs 1,200 crore of extra incremental wage costs on a quarterly run-rate basis. This has already been factored into our FY24F estimates," Nomura India said.

Taking into account the retrospective wage provisioning from November  onwards, Nomura India estimated the impact of one-time wage revision provisioning in Q3FY24 to be Rs 1,600-3,300 crore, along with an extra wage bill of Rs 900-1,800 crore in H2FY24.

"Hence, the total increase in wage bill for H2FY24F could be to the extent of Rs 2,500-5,000 crore. This could hence result in a negative impact of 3-5 per cent to our FY24F PPOP estimate and 3-7 per cent to our FY24F PAT estimate (including tax benefit). We await clarity on the exact quantum here," Nomura India said.

(Disclaimer: Business Today provides stock market news for informational purposes only and that should not be construed as investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.)

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