SBI Q3 beats f'cast but bad loans rise

People walk in front of a signboard displayed at the head office of State Bank of India in Mumbai November 9, 2009.

MUMBAI (Reuters) - State Bank of India (SBI.NS), the country's biggest lender, reported an unexpected rise in bad loans for the third quarter, taking the shine off healthy growth in loan demand and interest income that helped it post a 15 percent rise in net profit.

The rise in net non-performing assets of the state-run bank, which is the lead lender to a number of troubled companies including Air India and Kingfisher Airlines (KING.NS), dampened investor hopes that its asset quality had stabilised.

"They have disappointed in terms of asset quality, but that can be put down to Kingfisher," said Manish Agarwalla, banking analyst at MF Global Sify Securities in Mumbai.

Shares in the bank, which the market values at about $28 billion, closed down nearly 2 percent in a firmer overall market on Monday after it said its non-performing assets rose to 2.22 percent of the total from 1.61 percent a year earlier.

SBI reported a record net profit of 32.6 billion rupees for the three months to December 31, up from 28.3 billion rupees a year earlier. Net interest income rose 26.7 percent from a year earlier to 114.7 billion rupees.

Analysts, on average, had expected a 10 percent rise in net profit to 31.2 billion rupees, according to Thomson Reuters I/B/E/S. The numbers are for SBI's core banking operations and exclude businesses such as insurance and investment banking.

"The only negative aspect is the non-performing assets," said Krishnan ASV, banking analyst at Ambit Capital in Mumbai.

SBI's large private rivals, including ICICI Bank (ICBK.NS), HDFC Bank (HDBK.NS) and Axis Bank (AXBK.NS), have also reported better-than-expected quarterly earnings, allaying some concerns about the asset quality of India's banks.

SBI set aside 30.1 billion rupees for bad loans in the quarter, nearly 85 percent more than in the December quarter of 2010. In the preceding quarter, it increased provisions for non-performing loans by 35 percent from a year earlier.

The bank's performance is expected to improve in coming quarters as impaired loans are not likely to rise significantly, Chairman Pratip Chaudhuri told reporters.

"The aberration that we had seen in the past quarters is over," he said. "The bank is now on a consistent path of profitability."

SBI reported an unexpected plunge in net profit in the March quarter, followed by two more disappointing quarters as bad loans and provisions increased.

Concern about rising bad loans in Asia's third-largest economy prompted Moody's to cut its outlook for the Indian banking sector to negative from stable in November.

LENDING, MARGINS RISES

SBI's gross lending rose 17.5 percent from a year earlier to 8.7 trillion rupees at the end of December.

That was faster than the annual loan growth of 16.9 percent in the three months to September.

The central bank has said it expects credit to grow by 16 percent this fiscal year ending March 31, down from 20 percent a year earlier.

SBI said its net interest margin, a key gauge of profitability, rose to 3.82 percent in the December quarter from 3.4 percent in the same period a year earlier.

The bank expects an improvement of 5-10 basis points in the margin in the current quarter compared with the December quarter, Chaudhuri said.

Net interest margins are forecast to improve to 3.8 percent for the fiscal year from an earlier projection of 3.65 to 3.75 percent, he said.

"Our source of strength comes from net interest margins," Chaudhuri said. "So to that extent we will be able to absorb any any additions in bad loans."

Chaudhuri has previously said that SBI, which already holds about a quarter of India's loans and deposits, plans to increase its market share for loans by 1 percentage point a year.

MORE CAPITAL

SBI, which was downgraded by Moody's Investors Service in October because of its thin capital base and worsening asset quality, is counting on a government capital infusion of $1.6 billion in the current fiscal year, but has said it needs double that amount to maintain its capital adequacy ratio as it grows.

The bank's capital adequacy ratio under Basel II rules narrowed to 11.6 percent at end-December from 12.11 percent a year earlier. Its core Tier I ratio slipped to 7.59 percent from 8.53 percent.

The capital injection from the government, along with earnings, are expected to push up SBI's Tier I ratio to more than 9 percent by March 31, Chaudhuri said.

The bank may cut interest rates for some products such as education loans to boost credit growth but is not considering a cut in its 10 percent base rate, he said.

The Reserve Bank of India cut the cash reserve requirement for banks by 50 basis points last month but banks have expressed reluctance to cut their rates because of their high cost of funds.

The RBI raised rates 13 times between March 2010 October 2011, slowing demand for credit in Asia's third-largest economy and triggering worries about pile-up of bad loans.

SBI shares, which fell 42 percent in 2011, closed 1.96 percent lower at 2,129.25 rupees, after being down about 3.5 percent just before the results were released.

(Aditional reporting by Henry Foy in MUMBAI; Writing by Sumeet Chatterjee; Editing by Ted Kerr)