India SBI looks in stronger Q2

NEW DELHI: State Bank of India expects a stronger second quarter after provisions for sour loans coupled with treasury losses led to a second straight drop in quarterly profit for the country's top lender.

SBI, which with its associates controls about a quarter of Indian bank loans and deposits, has been aggressively making provisions in recent quarters, as its Chairman Pratip Chaudhuri has vowed to clean up its balance sheet since he took over in April.

SBI on Saturday posted a 46 percent drop in net profit for its fiscal first quarter ended June.

For the preceding quarter, profit had plunged 99 percent, when its provisions soared.

"We will not have the treasury losses that we incurred in this quarter.

So profits will automatically go up," Chaudhuri told reporters in New Delhi.

The bank expects its September quarter net profit at about 25 billion rupees, Chaudhuri said, almost flat compared with the year-ago period.

"We are under an obligation to reach a provision coverage ratio of 70 percent...We are happy we have come very close to it. 68 percent is our ratio now," said Chaudhuri.

High interest rate have dampened demand for credit in Asia's third-largest economy, and Chaudhuri expects the bank's credit book to grow 16-19 percent and deposits by 20-21 percent for the fiscal year ending March, 2012.

India's central bank raised its key lending rate by a surprise 50 basis points last month to fight inflation.

It also cut credit growth forecast for banks to 18 percent from 19 percent projected earlier.

Banks have seen a drop in net interest margins a key gauge of profitability for banks due to higher borrowing costs, but pressure on margins could ease in the coming quarters as banks pass on lending rate increases to customers.

SBI reported net interest margins (NIM) a key measure of efficiency of 3.62 percent for the period, and Chaudhuri said he is "tempted" to raise his previous outlook for NIM by 10 basis points to 3.6 percent.

He said he expects government's contribution in the bank's planned rights issue at about 50-90 billion rupees this fiscal year.

Bad loans at Indian banks are expected to rise to about 2.6 percent of their total assets in the year to March 2012 from 2.3 percent a year ago, ratings agency Crisil has said.

Last month, the country's second largest lender, ICICI Bank, posted a 30 percent growth in net profit, but missed estimates as higher expenditure offset strong credit growth and lower provision for bad loans.

"On the asset quality side, you have seen it is deteriorating in the industry as a whole, and it is going to happen to them also," said Atul Kumar, senior fund manager equity, Quantum Asset Management Company.

The state-run lender's total provisions in the first quarter rose 168 percent on the year to 41.57 billion rupees, and within it provision for non-performing assets (NPAs) increased by 60.5 percent to 27.82 billion rupees from a year ago.

SBI said net profit in April-June fell to 15.84 billion rupees ($349 million) from 29.14 billion rupees a year ago.

"We are sitting on large liquidity and we are trying to increase our profitability in the international business," Chaudhuri said.

Net interest income (NII) or the difference between interest earned and interest expended on a standalone basis for the June quarter was at 96.99 billion rupees, versus 73.04 billion a year ago. On a consolidated basis, it was at 131.24 billion rupees compared with 103.51 billion rupees.

He added that the bank is also looking at a possible initial share sale of its life insurance arm, but will take a final call only after regulatory authorities come up with detailed guidance.

Shares of SBI, valued at $30.7 billion, closed 2.2 percent lower at 2197 rupees on Friday.

Copyright Reuters, 2011