State Bank of India, India's largest lender, beat expectations with a 25 percent rise in quarterly profit on Friday and a drop in its closely monitored bad debt ratio, predicting an improvement ahead. Analysts in the sector have been watching for signs that credit quality is stabilising in India. State-owned banks that dominate the industry have been grappling with their worst bad debt burden in a decade, after years of liberal lending and slow credit growth.
Friday's earnings provided room for optimism. SBI, which has been tightening scrutiny of borrowers and increasing fund recovery efforts, said gross bad loans as a proportion of total loans dipped to 4.15 percent in July-September from 4.29 in the previous three months. SBI chairman Arundhati Bhattacharya said the economy needed to grow faster to secure stable asset quality, but forecast improvements ahead for the bank, a bellwether for the industry.
"Overall, I think we are beginning to see the end of this entire cycle and today I would say I am much more confident about the quality of assets going forward," she told reporters. Punjab National Bank, India's fourth largest, echoed the dip in bad loans with a ratio of 6.36 percent versus 6.47 percent.
The news sent SBI shares up over 4 percent on the day and PNB more than 3 percent, against a near flat market. "SBI and PNB's asset quality has been stabilising for the past few quarters," said Vaibhav Agarwal, analyst at Angel Broking. "Large state-run banks that have slowed down lending are seeing improvement in asset quality: you have to be conservative in a bad environment." In a further sign of improvement, SBI said it saw a faster growth in mortgage and auto loan books, helping it offset slower loan growth to small companies and bolstering its plans to hit a loan growth target of 14 percent for the year ending in March.
Yet in an illustration of the sector's uneven and fragile improvement, Bank of Baroda Ltd, India's second-biggest state-run lender, posted a spike in bad loans and provisions that pushed quarterly net profit down almost 90 percent - a fraction of expectations. Bank of Baroda was one of the first state-owned lenders to appoint a boss from the private sector: P. S. Jayakumar, former head of a real estate firm, joined in October, and analysts said the just-ended quarter would mark a transition.
On Friday, Jayakumar said the bank had at least two "tough" quarters ahead. "Managing NPAs and enhancing credit quality is one big, immediate goal," he told reporters. Bank of Baroda's high exposure to large infrastructure groups and steel and mining companies, badly hit by cheap Chinese imports and low prices, has been weighing on asset quality in recent quarters.