State Bank of India posts steepest quarterly profit fall in over two years

MUMBAI (Reuters) - State Bank of India (SBI) posted its steepest quarterly profit fall in more than two years as nonperforming loans increased, underlining the difficulties the bank's first chairwoman faces in keeping a lid on deteriorating assets.

Indian state banks such as SBI, with their high exposure to the power and infrastructure sectors, have been hammered by the country's economic slowdown. Punjab National Bank , the third-biggest state lender, posted lower-than-expected earnings last week.

SBI, India's No.1 public sector bank, said on Wednesday net profit slumped 35 percent to 23.75 billion rupees in the quarter ended September. Analysts on average had expected profit of about 27 billion rupees.

Net nonperforming loans, as a percentage of total assets, rose to 2.91 percent from 2.83 percent in the preceding quarter.

But the pace of bad loan growth slowed. SBI, which accounts for a quarter of India's loans and deposits, said net new bad loans fell over 39 percent from the previous quarter.

Net interest margin, a key gauge of profitability for banks, rose marginally to 3.51 percent in the second quarter. That helped send SBI's shares up by more than 3 percent in Mumbai trading.

"The guidance generally is that fourth-quarter onwards, things should improve, but we need to see tangible signs of that," said Nitin Kumar, banking analyst at local brokerage Quant Broking.

"The macro is still challenging, inflation is high, there could be more interest rate hikes and the ability of banks to pass on higher costs to borrowers is limited. So, we need to see sustainable signs of improvement," Kumar said.

The Indian economy is expected to grow 5 percent in the year ended March, a far cry from near double-digit growth in 2008. Last month, annual consumer price inflation quickened more than expected to 10.09 percent from 9.84 percent in September, driven by food and fuel prices.

Analysts, in general, expect SBI's focus on improving asset quality to continue even under its new chairwoman, Arundhati Bhattacharya, who was elevated to the top job only last month.

Bhattacharya will be under pressure to keep a lid on nonperforming loans and weakening profit growth while helping to reassure investors who have pulled down the bank's shares by almost half since a peak in November 2010 as the economy lost momentum.

Earlier, smaller rivals Bank of India Ltd and Canara Bank Ltd posted a drop in non-performing assets as of the end of September, helping to fuel speculation that the bad loans weighing on state banks may be easing.

But they were the exceptions.

Most Indian state banks disappointed the street with falling profits, operating losses or worsening asset quality in the second quarter.

SBI's shares ended up 1.44 percent to 1,697 rupees, after the bank posted data showing bad loans increased at a slower pace. The NSE banking index gained 0.44 percent.

"I don't believe stressful times are over yet," said P. Phani Sekhar, fund manager at Angel Broking. "We will see over the next two quarters how SBI performs and then see where shares are and if we can add SBI to our portfolio."

(Reporting by Swati Pandey; Editing by Ryan Woo)