State Bank of India 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, increased 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 added.
SBI shares fell as much as 5.3 % to 1,892.15 rupees after the results. At 2:25 p.m (0855 GMT), the shares were down 4.9 % at 1,998.2 rupees.
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." On Tuesday, smaller state-run peer Bank of India's had reported that its September-quarter net profit fell more than a fifth on higher provisions to cover worsening asset quality.
PROFIT RISES ABOVE FORECASTS
SBI reported net profit of 28.1 billion rupees ($564 million) for its fiscal second quarter ended Sept. 30, compared with 25.01 billion rupees a year earlier.
A Reuters poll had projected a net profit of 24.3 billion rupees on a standalone basis.
Net interest income rose about 28 % from the previous year to 104.2 billion rupees.
The state-run bank increased its provisions for non-performing assets by 35 % over the previous year to 29.21 billion rupees in the quarter.
Rivals ICICI Bank and HDFC Bank had earlier posted forecast-beating net profit increases of 22 % and 32 %, respectively.
India's central bank, which expects credit to grow by 18 % in the full fiscal year, raised interest rates last month for the 13th time in a tightening cycle that began in early 2010 to fight persistently high inflation.
Policy rates are at their highest since the global financial crisis in 2008, and many investors and corporate officials have been calling on the central bank to halt its monetary tightening given the slowdown in growth.