State Bank of India's outlook eases pain of profit fall

By Devidutta Tripathy and Supriyo Hazra

MUMBAI/KOLKATA, India (Reuters) - State Bank of India (SBI) reported its sharpest quarterly profit drop in five years on Friday but cheered investors by saying that fewer than feared of its loans risked turning sour.

A clean-up call given by the Reserve Bank of India (RBI) has led to a surge in banks' bad loans in the past two quarters, forcing them to set aside more funds and leading to losses at more than a dozen state-run lenders.

RBI chief Raghuram Rajan wants the lenders to have fully cleaned up their balance sheets by March 2017, after criticism that the banks were not correctly classifying distressed assets for years.

SBI, which accounts for about a quarter of India's loans and deposits, said on Friday its bad loan provisions more than doubled from a year earlier to 121.39 billion rupees ($1.81 billion). That led to a worse-than-expected 66 percent drop in net profit to 12.64 billion rupees for its fourth quarter to the end of March.

The bank, which had 1.37 trillion rupees worth of stressed loans as of March, said it had put another 310 billion rupees of loans from sectors such as steel and power under "special watch" status for potential trouble.

Chairman Arundhati Bhattacharya said 70 percent of the watch list loans could turn non-performing in the worst case, while she added that the figure would be as low as 30 percent if the economy improves.

Shares in SBI jumped 6.4 percent, their biggest gain in nearly three months, on the shorter than expected watch list.

"They have not said that all the pain is gone, but indicated that the worst could be over," said Siddharth Purohit, a banking analyst at Angel Broking in Mumbai.

"That's a big positive," he said of the size of the watch list of loans.

Canara Bank and Indian Overseas Bank -- two other state-run lenders which also reported on Friday -- reported fourth-quarter losses and far higher bad-loan ratio than SBI.

So far, a total 14 state-run lenders have reported combined losses of $3.8 billion after the RBI-ordered clean-up.

($1 = 66.9980 rupees)

(Additional reporting by Gaurav Dogra in Bengaluru; Editing by Kenneth Maxwell and Keith Weir)