State Bank of India first-quarter results weighed down by subsidiary bank mergers

By Devidutta Tripathy and Tanvi Mehta

REUTERS - State Bank of India's first-quarter profit fell short of expectations as the nation's top lender by assets saw a spike in bad loans after merging five subsidiary banks with itself, sending its shares more than 5 percent lower.

Indian banks' sour assets have surged in the past year or so after a regulatory crackdown to clean up the sector dominated by state-run lenders. This year, the government gave the central bank greater power to push defaulting borrowers into bankruptcy proceedings.

State Bank, under Chairman Arundhati Bhattacharya who has been at the helm since October 2013, has fared better than its state-run peers in managing its bad loans. However, the five so-called associate banks that were merged with the parent effective April 1, had a relatively poor asset quality.

SBI, which on Friday reported its first quarterly results after the merger, said net profit was 20.06 billion rupees ($312.84 million) in the three months through June, from 3.74 billion rupees a year earlier. Pre-merger, the bank's year-earlier profit was 25.21 billion rupees.

The result compared with the 30.29 billion rupee average analyst estimate, Thomson Reuters data showed.

Bhattacharya, whose four-year term is due to end in October, told a news conference the bank expected a "pull back", guiding for lower additions to bad loans in the full year to March 2018 and improvement in net interest margins.

The bank expects its slippage ratio to fall to below 3.3 percent in the year to March 2018, from 5.78 percent last financial year, it said in a presentation. Provisioning costs will likely be less than 2.25 percent in 2017/18 compared with 2.9 percent last year.

However, loan growth will remain muted at 6 to 8 percent for the full year, Bhattacharya said, as the economy is still adjusting to factors including a ban on high-value banknotes late last year and a new goods and services tax that was implemented last month.

SBI, which accounts for more than a fifth of India's banking sector assets, said for the merged entity, gross bad loans as a percentage of total loans rose to 9.97 percent at the end of June from 9.11 percent three months earlier and 7.40 percent at the end of June last year.

The bank will need to make additional provisions of 85.71 billion rupees this financial year for its exposure to 12 large borrowers which have been taken to bankruptcy court, SBI said. It has outstanding loans of 502.47 billion rupees on those accounts.

Bank of Baroda, the fifth-biggest Indian lender by assets, also reported on Friday first-quarter profit more than halved and its bad-loan ratio widened.

SBI shares closed 5.6 percent lower in a Mumbai market that fell 1.1 percent. Bank of Baroda shares closed 4.2 percent down.

($1 = 64.1225 Indian rupees)

(Reporting by Devidutta Tripathy and Tanvi Mehta; editing by Christopher Cushing and Susan Thomas)