SBI's results signal Indian banks' record bad loans peaking

MUMBAI (Reuters) - State Bank of India (SBI) posted quarterly results that indicated the nation’s lenders may see a slower build-up of bad loans, but questions remain on how quickly and smoothly they can get rid of $146 billion of such debt that has already piled up.

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SBI, the nation’s top lender with a share of more than fifth of the banking assets, reported on Friday a lower-than-expected profit, but its bad loan additions during the three months to end-September slowed sharply and pushed the overall bad-loan ratio down.

Its stock surged more than 6 percent after the results.

Helped by a stake sale in its life insurance arm, SBI said its second-quarter net profit was 15.82 billion rupees ($243.3 million), compared with a restated net loss of 5.57 billion rupees a year earlier. The profit was lower than analysts’ estimates of 26.96 billion rupees, marred by a rise in provisions.

Newly appointed SBI Chairman Rajnish Kumar, who took over last month, said they used the cushion from the insurance stake sale to bolster provisions and improve the coverage ratio by 431 basis points in a quarter to 65.1 percent.

“The idea is that we enhance our loss absorption capacity,” he told reporters on a conference call, adding they aimed to further improve the provision coverage ratio as the banking sector moves towards international accounting standards.

State-run lenders account for the bulk of Indian banks’ soured loans which were at a record 9.5 trillion rupees as of June. The surge in bad loans has choked new lending in an economy which needs revival in investment to help spur growth.

Given the grim situation, the Indian government last month announced a $32 billion recapitalisation of state lenders to help resolve bad loans and kick-start lending growth.

SBI, which has the biggest share of the soured loans, merged its five subsidiary banks with itself earlier this year, driving a jump in its non-performing loans as of June to almost 10 percent. That ratio eased to 9.83 percent at end-September, while the additions to bad loans during the quarter was nearly a third of the rise in the previous three months.

“The results were comforting to see and is probably the best set of numbers from SBI that we’ve seen in the recent past especially when there is still uncertainty over non performing loans issue,” said Aalok Shah, a banking sector analyst at Mumbai’s Centrum Broking.

Bank of India, the market’s sixth-biggest lender by assets which also reported on Friday, posted a better-than-expected 41 percent rise in second-quarter profit and a narrower bad-loan ratio.

The banking sector faces a rise in provisions for loan losses after a central bank order to cover at least 50 percent of the loans to companies being sent to bankruptcy court. A dozen of the biggest loan defaulters are already at the bankruptcy court, while nearly 30 more could be headed there after December.

SBI said it has more than 50 percent provision coverage for the bankruptcy cases.

SBI shares closed 6.3 percent higher in a Mumbai market that ended up 0.12 percent on Friday. The stock has gained about 30 percent in the past one month to be the second-best performer among the constituents in the main market index.

($1 = 65.0350 Indian rupees)

Reporting by Devidutta Tripathy and Samantha Kareen Nair; Additional reporting by Swati Bhat; Editing by Muralikumar Anantharaman