SBI Q3 net seen hit by bond moves

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State Bank of India, the country's top lender is likely to post lower quarterly net profit on sluggish credit demand and a fall in treasury incomes as bond yields rose.

But increasing business and consumer confidence is reinvigorating corporate, housing, auto and retail demand in Asia's third-largest economy, with banks looking to improve their asset quality.

Bank credit grew an annual 13.7% in early January, having fallen to 9.7% in October despite a reduction of 300-350 basis points in lending rates since the global crisis.

"There are some signs of improvement in credit growth and it will gradually recover," said Srividhya Rajesh, fund manager at Sundaram BNP Paribas Asset Management. As economic growth picks up, we could see a decline in bad debts as well."

Indian banks were mostly insulated from the direct impact of the global credit crisis, but the world downturn hit the country harder than expected and led to a sharp slowdown in credit growth in the current financial year.

While the Reserve Bank of India has projected 18% growth in loans for the year through March, banks say they may fall short and end the fiscal year at 15-16% credit growth -- still a far cry from growth rates of more than 30% over the past few years.

HDFC Bank last week reported a 32% rise in quarterly profit as the second-ranked private sector lender rode robust loan growth, and analysts said they expected the bank to maintain that pace in the coming quarter.

Banks have urged the central bank to keep interest rates stable at its policy review later this month, saying any increase could further dent sluggish loan demand.

Brokerage Motilal Oswal said provisioning for bad loans at State Bank was likely to be high in the last quarter due to the central bank's target to raise the minimum provision ratio for bad debts to 70% from 10% by September 2010.

However, conservative lending and an improvement in the economy and business confidence could mean the number of loan defaults would increase less rapidly in the near future.

At State Bank, which with associates controls a quarter of Indian bank loans and deposits, focus will be on its loan growth and overseas plans. It said in September it was looking at acquisitions for up to $1 billion in Britain.

The bank is eyeing foreign acquisitions to boost its overseas profit contributions from about 10%.

Analysts said State Bank should see an improvement as it increases low-cost deposits and cuts high-cost term deposits.

However, a fall in treasury incomes will weigh on profits at both banks due to a near-50 bps increase in the yield on the benchmark 10-year bond in the quarter.

In the year ago period, the benchmark bond yield fell sharply, boosting bank profits.

According to StarMine SmartEstimates, which predict future earnings by putting more weight on recent forecasts of top-rated analysts, State Bank's earnings per share are likely to show a positive surprise of 2.5% versus the mean forecast for the year to March.

State Bank shares rose 3% in the December quarter, in line with the sector index.

Following are forecasts from a Reuters poll of analysts.

Net profit net interest income P/E
(billion rupees) (billion rupees)

MEAN % CHANGE/YR % CHANGE/YR
State Bank 24.50 -1.1 60.44 5.0 12.12

ICICI 10.55 -17.1 20.94 5.2 23.89

Poll contributors: Ambit Capital, Batlivala & Karani, Motilal Oswal, Prabhudas Lilladher, Religare Hitchens Harrison, CLSA, KR Choksey, Antique Stock Broking, Citigroup, Edelweiss, Morgan Stanley, IDFC-SSKI and Sharekhan.