State Bank of India, the nation’s largest, posted its weakest pace of profit growth in three years following losses on surplus funds invested in government bonds.
Chairman Om Prakash Bhatt said excess funds held by the lender, which accounts for a fifth of India’s banking assets, averaged 750 billion rupees during the quarter. The funds, part of which are required to be invested in government bonds, led to 450 million rupees in losses as accelerating inflation fueled concerns the central bank will raise rates and forced lenders to write down the value of their investment portfolios.
“The additional liquidity will prevent State Bank from raising lending rates, which means that the bank cannot expect higher income from its core business,” said Shashin Upadhyay, an analyst at Alchemy Share & Stock Brokers Pvt. “Typically credit does not pick up in the fourth quarter, so that will be a constraint and a concern for State Bank” as well.
Shares of State Bank rose 0.2 percent to 2,091.6 rupees as of the close of trading yesterday before the results were announced. The stock gained 76 percent last year, less than the 84 percent increase in India’s 18-stock Bankex index.
RBI Meeting
The Reserve Bank of India may plan its first interest rate increase since 2006 at a Jan. 29 meeting to curb inflation, Goldman Sachs Group Inc. has said. India’s central bank injected about $123 billion into the banking system between October 2008 and April 2009 by reducing interest rates and lowering lenders’ reserve requirements to bolster economic growth.
Indian bonds completed their worst year in at least a decade in 2009 as food prices surged and the government said it plans to borrow a record 4.51 trillion rupees in the fiscal year ending March 31 to stimulate the economy. Income from investments in government bonds dipped in the quarter as India’s 10-year yields rose by 38 basis points.
“We have a huge amount of liquidity and it is costing us a lot,” Bhatt told reporters in Mumbai yesterday.
State Bank’s excess funds during the quarter yielded 4.77 percent, compared with the 529.9 billion rupees in surplus liquidity that yielded 7.53 percent a year earlier, according to a statement distributed in Mumbai.
Higher Provisions
The company increased funds set aside for losses on investments and other assets to 8.57 billion rupees from 1.97 billion rupees a year earlier.
“Higher provisioning is the biggest concern for the sector and particularly for State Bank of India since it holds the largest market share,” said R. Srinivasan, an analyst at Kim Eng Securities India Pvt. in Mumbai who rates the stock “buy.”