Rising bad loans offset SBI profit

State Bank of India (SBI) posted a 12.4% growth in net profit in the September-quarter, after two quarters of decline, but a rise in non-performing assets battered investor confidence, sending its shares down more than 5%.

Worries about worsening asset quality in Asia’s third-largest economy prompted Moody’s Investors Service earlier on Wednesday to cut its outlook on the Indian banking sector to “negative” from “stable.”

Net non-performing assets at SBI, which controls about a quarter of Indian bank loans and deposits, rose to 2.04% of total assets at the end of September from 1.7% a year earlier.

“It is the increase in NPAs (non-performing assets) that hit the stocks today. It is a concern for the entire sector,” said Arun Khurana, fund manager at UTI Banking Fund.

“However, going forward, we expect pain from legacy NPAs to subside,” he said.

SBI shares fell 6.76% or by Rs135.05 to Rs1,862.50 on the Bombay Stock Exchange on Wednesday.

In October, the shares had fallen to their lowest level in 2 years after Moody’s cut its standalone rating to D+ from C-.

“People are likely to stray from state-run banks to private ones, some of which have better asset quality,” a local fund manager who did not want to be named said.

“But then valuations are going to come down, and from a long-term risk-return perspective, it makes sense to go for SBI.”

On Tuesday, smaller peer Bank of India said its September-quarter net profit fell more than a fifth on higher provisions.