State Bank of India, the nation’s largest lender, plunged in Mumbai trading after fourth-quarter profit dropped 99 percent to the lowest in at least 10 years as it set aside more funds for bad loans.
The shares declined 7.7 percent to 2,414.7 rupees at the 3:30 p.m. close in Mumbai, the most in almost two years. Net income dropped to 208.8 million rupees ($4.6 million) for the three months ended March 31, from 18.7 billion rupees a year earlier, the bank said in a filing to the Bombay Stock Exchange today. That compared with the 30.8 billion rupee average of 27 estimates compiled by Bloomberg.
Chairman Pratip Chaudhuri, who took the helm at the state-owned company last month, said lending this year may be restricted following nine interest rate increases by the central bank since March 2010. Higher-than expected provisioning could make the lender better positioned to tackle slowing credit growth in an economy forecast by the government to grow at about 8 percent in the year to March 31, from 8.6 percent in the previous period.
“This basically is the new management saying let’s clean things up and start afresh,” Brian Hunsaker, an analyst at Keefe, Bruyette & Woods, said in a phone interview today from Hong Kong. “This wasn’t the base-case expectation of the market. It wasn’t communicated well at all that this was coming, that’s why the stock is reacting this way.”
State Bank increased provisions for bad loans and other contingencies by 77 percent to 41.6 billion rupees, according to its statement. The coverage ratio widened to 64.95 percent as of March 31, from 64.1 percent on Dec. 31. One-off provisions on gratuities and pensions contributed to the jump, Chaudhuri said.
The lender will need to set aside another 11 billion rupees over the next two quarters to meet the Reserve Bank of India’s provisioning rules, Chaudhuri said.
The central bank has increased interest rates nine times since March 2010 to tame inflation that was 8.7 percent in April.
“Credit growth for this year should be in line” with the Reserve Bank of India’s guidance of 18 percent, Chief Financial Officer Diwakar Gupta told media in the eastern Indian city of Kolkata today. Growth will moderate by up to 3 percent from last year’s levels, said Gupta, who assumed his role in April.
Chaudhuri declined to provide a timeline on State Bank’s plans to raise 200 billion rupees from a rights offer, saying it was a “work in progress.” The government may delay the sale until it finds the money to invest and maintain its 59.4 percent stake, former Banking Secretary R. Gopalan had said in January.
State Bank’s capital adequacy ratio under the so-called Basel II norms shrank to 11.98 percent during the quarter from 13.39 percent a year earlier. That compares with 19.54 percent at ICICI Bank Ltd., the nation’s largest private-sector lender, and 12.42 percent at Punjab National Bank, the No. 2 state-owned lender in India.
“Management is going to have to explain what’s going on and their strategy for the future,” Hunsaker said. “Credit quality ratios don’t look very good.”
Loans climbed by 20 percent to 7.72 trillion rupees as of March 31, from 6.4 trillion rupees a year earlier, State Bank said. Deposits rose 16 percent to 9.34 trillion rupees. Bad loans dropped to 1.63 percent of total advances in the quarter from 1.72 percent a year earlier, it said.
Net interest income, or revenue from borrowers after deducting interest paid to depositors, climbed 20 percent to 80.6 billion rupees from 67.2 billion rupees a year earlier. Net interest margin, a measure of lending profitability, widened to 3.32 percent from 2.66 percent in March 2010.
Non-interest income, which includes fees tied to debit cards as well as income from distribution of mutual funds and insurance products, climbed 6.8 percent to 48.2 billion rupees.
The stock’s rout today extends its decline for the year to 14 percent, compared with a 12 percent decline in India’s benchmark Sensitive Index and 9 percent retreat by India’s 14-stock Bankex Index.