Mumbai: State Bank of India, the country's largest lender, posted a second-straight surge in quarterly net profit on strong loans growth, beating street expectations, but a rise in bad loans pulled its shares down.

The results show that government-owned SBI's efforts to clean up its books since last year are yet to pay off and it is yet to bridge the gap between the quality of its earnings and those of private sector lenders such as ICICI Bank and HDFC Bank.

Government-owned lenders account for 70 percent of the market in India but their lending decisions are not always driven by commercial considerations. State-run banks last month reported a spike in bad loans for the June quarter, while the private lenders showed stable asset quality.

SBI's net profit more than doubled to 37.52 billion rupees from 15.84 billion a year earlier. Analysts, on average, had expected a net profit of 36.17 billion rupees.

Its non-performing loans rose to nearly 5 percent at end-June from 3.5 percent a year earlier but provisions, or the funds set aside for bad loans and contingencies, were down 41 percent to 25.6 billion rupees.

SBI shares were down 4.5 percent on Friday afternoon, in a Mumbai market that was down 0.4 percent.

Net interest income, or the difference between interest earned and interest expended, rose 14.6 percent to 111.19 billion rupees.

Standard Chartered said in a post-earnings note SBI's new bad loans at end-June were at a record 108.4 billion rupees compared to the 55 billion rupees guidance given by the management.

SBI, in which the government owns about a 60 percent stake, had posted an improvement in its bad debts in the March quarter. Its shares have risen by a third from lows hit in December, about double the broader market's rise.

But, with a slowdown of India's economy accelerating and its monsoon rains failing, things might get tricky again. Earlier in the day UBS downgraded the bank to "sell" from "buy" saying a weak monsoon would add to its already high bad loans.

The International Monetary Fund has sharply downgraded growth estimates for India to 6.1 percent this fiscal year and 6.5 percent in the next.

SBI's exposure to embattled Kingfisher Airlines and Air India is also causing some nervousness to investors.

UBS downgrades SBI to 'sell' from 'buy'

UBS downgraded State Bank of India to "sell" from "buy", saying a weak monsoon would add to its "already high" non-performing loans, while expecting margins to decline due to rising cost of funds and potential cuts in the lending rate.

UBS lowered its fiscal 2013 and 2014 earnings forecasts by 13 percent, while reducing its 12-month price target on India's biggest lender by 30 percent to 1,800 rupees, in a note released late on Thursday.


Latest News  from Business News Desk