State Bank Pares Debt Holding to Boost Profit: Corporate India

State Bank of India, the nation’s largest lender, said profit from sale of investments will see a “substantial” jump after the rupee’s plunge prompted the company to accelerate selling its government debt holdings.

The state-run lender sold the securities because the currency’s depreciation will halt further easing of bond yields after the biggest drop since 2008, Pradeep Kumar, head of global markets at the lender, said in an interview, without giving details. India’s central bank yesterday kept its benchmark rate at 7.25 percent and flagged “upside” pressures on consumer prices from a further fall in Asia’s worst-performing currency this quarter.

“For the next three months, bond yields below 7 percent don’t look possible,” Kumar said in his office in Mumbai. “Depreciating rupee makes inflation stubborn,” which prompted State Bank to “book substantial profits,” he said.

Gains from selling part of its debt holdings will help the Mumbai-based company revive profit from the first slump in two years, according to Nitin Kumar, an analyst at Quant Broking Ltd. Analysts forecast the bank’s profit, which dropped 18 percent in the three months to March, to fall for a second straight quarter in the period ending June 30 as bad loans rise.

State Bank’s shares, which have dropped 14 percent this year, fell 1.1 percent to 2,043.6 rupees in Mumbai. The benchmark S&P BSE Sensex has dropped 1.1 percent.

The lender’s profit will drop 0.5 percent to 37.3 billion rupees ($643.5 million) in the three months ending June 30, according to an average of three analyst estimates compiled by Bloomberg.

Yields Rebound

The yield on the benchmark 8.15 percent notes due June 2022 have rebounded from 7.34 percent touched on May 27, the lowest level since the securities were issued, as the rupee’s losses threatens to stoke inflation by making imported goods costlier. The yield rose three basis points, or 0.03 percentage point, to 7.48 percent in Mumbai, according to the central bank’s trading system.

Asia’s third-largest economy buys about 80 percent of its crude supplies from overseas. Indian Oil Corp., the nation’s biggest refiner, on June 15 raised gasoline prices by 2 rupees a liter.

State Bank’s treasury also revamped its equity investments in the year ended March 31 by purchasing shares in the 50-company CNX Nifty Index and selling illiquid stocks and shares outside the index to help curtail volatility in profits at the treasury business, Kumar said.

The bank will hold investment in shares for the long-term, he said. Kumar declined to give details. The lender reported a profit of 11 billion rupees on sale of investments in the 12 months to March 31 after reporting a 9.2 billion rupee loss a year earlier, filings to exchange show.

‘Wide Fluctuations’

“Wide fluctuations in treasury income was a wild card in State Bank’s earnings in recent years,” Hatim Broachwala, a Mumbai-based banking analyst at Karvy Stock Broking Ltd., said by phone on June 14. “Overhauling the portfolio to add bluechip stocks adds more predictability to the results.”

Indian banks have to keep at least 23 percent of their total assets in securities including government debt, according to a central bank rule.

Improving treasury profit will help lenders grappling with rising bad loans amid decade-low economic expansion and high borrowing costs. Restructured assets and bad loans at banks will continue to rise in the year ending March 2014, Broachwala said.

Monetary Policy

State-run banks’ stressed assets, including those to grounded carrier Kingfisher Airlines Ltd. and wind-turbine maker Suzlon Energy Ltd., were at 11.59 percent as of Dec. 31, Fitch Ratings Ltd. said in an e-mail on June 14.

Net bad debt at State Bank widened to 2.1 percent of loans as of March 31 from 1.8 percent in the year before, exchange filings show. The measure at ICICI Bank Ltd., the second-largest by assets, was at 0.64 percent as of March 31.

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the Reserve Bank said yesterday after leaving borrowings costs unchanged.

“It is only a durable receding of inflation that will open up the space for monetary policy,” amid a record current-account deficit and elevated food prices.

India’s wholesale-price index increased 4.7 percent in May from a year earlier, a 43-month low. At the same time, a separate consumer inflation gauge climbed 9.31 percent. The rupee plunged 1.6 percent to 58.7725 to a dollar.

Rate Pause

“After factoring in the risks to inflation and also the global financial markets, we see a bigger probability for the RBI to stay on a pause in the July policy meeting,” Indranil Pan, chief economist at Kotak Mahindra Bank Ltd., said in an e-mail. “We also believe that the chances of an extended pause have increased.”

Borrowing costs in the $1.8 trillion economy are the highest among major Asian economies even after the Reserve Bank cut its policy rate thrice since January.

Companies are balking at the high interest rates reducing demand for loans. State Bank’s net interest income rose 0.1 percent in the three months ended March 31. The lender reported its first drop in net interest income since 2006 in the preceding quarter, according to data compiled by Bloomberg.

Loans at Indian lenders grew 14.1 percent in 12 months to May 31 after expanding 13.9 percent, slowest in more than three years, data compiled by the central bank shows.

State Bank had 500 billion rupees in additional liquidity as of June 12 as demand for loans slowed, Kumar said.

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