State Bank of India Shares Drop as Profit Falls on Defaults

State Bank of India shares dropped to the lowest in five months after the country’s largest lender posted a bigger decline in third-quarter profit than analysts had estimated amid rising bad loans.

Net income fell 34 percent to 22.3 billion rupees ($359 million), or 32.66 rupees a share, for the three months ended Dec. 31, from 34 billion rupees, or 50.61 rupees, a year earlier, the Mumbai-based lender said in an exchange filing today. The lowest profit in nine quarters missed the 25.2 billion-rupee median of 38 estimates compiled by Bloomberg.

The falling profit underscores the challenge Chairman Arundhati Bhattacharya faces in curtailing swelling defaults as India’s economic slump and rising interest rates dent borrowers’ ability to repay loans. The 207-year-old lender raised more than 100 billion rupees last month to boost capital buffers by selling shares to investors including the government.

“Non-performing assets are weighing down the bank’s profit and capital adequacy ratio,” Hatim Broachwala, a Mumbai-based banking analyst at Karvy Stock Broking Ltd., said by telephone. “Investors will be concerned until the stressed assets are contained.”

India’s economy will grow 4.9 percent in the 12 months through March 31, compared with the decade-low 4.5 percent in the previous fiscal year, the Statistics Ministry said Feb. 7.

Shares of SBI fell 1.7 percent to 1,475.1 rupees in Mumbai today, extending this year’s loss to 17 percent.

Bad Loans

The bank’s gross bad loans rose to 5.73 percent of the total by the end of December, from 5.3 percent a year earlier, the filings showed. Its 5.64 percent soured-debt ratio as of Sept. 30 was the highest among the five largest government-controlled banks by assets, according to filings.

Provisions for bad loans rose 24 percent from last year to 35 billion rupees, State Bank said today.

“We expect weakness in banks’ asset quality to persist for the next 12 months,” Amit Pandey, a Singapore-based analyst at Standard & Poor’s, said in a Feb. 10 e-mailed statement. “The economic recovery is likely to be tepid, and it will take time for the domestic industry to recover and corporate balance sheet leverage to decline.”

India’s slowing economy and the highest borrowing costs among major Asian economies are triggering more defaults. The ability of most companies to generate cash and service debt is at the lowest level in five years, Deep Narayan Mukherjee, a Mumbai-based director at the Indian unit of Fitch Ratings Ltd., said in a Jan. 15 interview.

Risk Buffers

SBI’s capital adequacy ratio under Basel III guidelines narrowed to 11.59 percent as of Dec. 31, from 11.69 percent at the end of September, the filings showed.

The lender raised 80.3 billion rupees from selling equity to institutions, according to a Jan. 30 statement. That followed the sale of 20 billion rupees of shares to the Indian government on Jan. 2. SBI’s capital ratio would improve to 12.8 percent following the fundraising, Bhattacharya said at the end of last month.

Net interest income, or revenue from lending minus payments on deposits, rose 13 percent in the third quarter to 126.4 billion rupees, SBI said. Total outstanding loans rose 10 percent from March to 11.8 trillion rupees as of Dec. 31.

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