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.”

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