India's largest lender, State Bank of India, posted an unexpected 20 percent fall in fourth-quarter net profit on May 19 due partly to higher deposit rates and a drop in the value of bond investments.
Net interest income fell 10 percent even though loan growth was strong on the back of an 8 percent expansion of Asia's third-largest economy.
SBI shares fell 4.4 percent after it said net profit had fallen to 8.53 billion rupees ($187.5 million) in the quarter to end-March from 10.65 billion a year earlier, while the median forecast in a Reuters poll had been for a slight rise to 10.72 billion.
But the state-controlled bank, which is expected to cut its holdings in seven associate banks through public share sales this year, forecast strong fee income this year as it seeks to emulate smaller but more aggressive private sector banks.
"Fee income from services will be significantly increased this year," Chairman A.K. Purwar told a news conference. The bank's fee income rose 13 percent to 39.96 billion rupees in the past fiscal year.
Private sector banks such as ICICI Bank and HDFC Bank make significant earnings from fees on services. Some fees have become so steep that the central bank said this week it was setting up a committee to ensure reasonable bank charges.
SBI expects loans to grow 23 percent this year, less than the 30 percent seen in the year to March 2006 but still higher than 20 percent forecast by the central bank for the industry.
After riding demand for loans from rapid corporate expansion in the last few quarters, the bank now expects loan growth from a wave of projects to upgrade India's infrastructure.
For the full year, SBI's net profit rose 2.3 percent to 44.06 billion rupees.
During the January-March quarter, bonds fell in value after the central bank raised short term rates by 25 basis points in January.
Shares in SBI, which has a market value of $10.8 billion, rose 6.7 percent during the March quarter, underperforming a 20 percent gain on the main index but beating the bank sub-index's 3.6 percent rise.