SBI posts smallest profit growth this year

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), the country's biggest lender, posted its smallest profit increase this year as bad loans constrained earnings growth, sending its shares lower.

Problem lending has risen to a record as India's worst economic slowdown in almost a decade clouds the outlook of the country's banks including SBI, which accounts for a quarter of all loans and deposits.

The state-owned bank, which has exposure to debt-laden firms such as Kingfisher Airlines Ltd (KING.NS), Air India Ltd AIN.UL and Deccan Chronicle Holdings Ltd (DCHL.NS), said bad loans rose to 5.15 percent of its loan book as of the end of September from 4.19 percent a year earlier.

Net profit for the quarter ended September 30 increased about 30 percent from a year earlier to 36.58 billion rupees. That compares with a more than doubling in net income in the previous quarter.

Analysts, on average, had expected a net profit of 35.69 billion rupees, according to Thomson Reuters I/B/E/S.

Shares in SBI fell as much as 3.77 percent in Mumbai trading, the biggest decline in a week. As of 0715 GMT, the stock was down 2.64 percent at 2,183.1 rupees, compared with a 0.42 percent drop in the Sensex.

SBI has been aggressive in identifying bad loans and making adequate provisions since Chairman Pratip Chaudhuri took reins of the bank in 2011. Still, problem loans at the bank are the highest in the industry. That, coupled with low capitalisation, prompted ratings agency Moody's to downgrade the bank last year.

Bad loans increased by nearly 45 percent to 492 billion rupees in the September quarter compared with a year earlier, SBI said.

Net interest income, or the difference between interest earned and interest paid out, rose nearly 63 percent during the period.

Large state-owned banks such as Punjab National Bank (PNBK.NS) and Canara Bank Ltd (CNBK.NS) earlier posted drops in net profit and a spike in bad loans in the fiscal second quarter, hurt by the economic slowdown. (Reporting by Swati Pandey; Editing by Ryan Woo)