State Bank of India, ICICI Profits Advance on Bond Investments

Jan. 25 (Bloomberg) -- State Bank of India and ICICI Bank Ltd., the nation’s two largest lenders, said third-quarter profit increased after government bonds posted their biggest quarterly gains in at least a decade, boosting investment returns.

State Bank, which accounts for almost a fifth of the nation’s loans, yesterday posted a 37 percent advance in net income to 24.8 billion rupees ($503 million), matching analyst forecasts. At Mumbai-based ICICI, profit rose 3.3 percent to 12.7 billion rupees, more than analysts had expected.

India’s central bank cut interest rates four times in the final three months of 2008 as inflation slowed, helping 10-year bonds complete their best year since 2001. That boost may not sustain banks going forward, as they set aside more funds to cover loan delinquencies by corporate clients and consumers.

“Gains from treasury will be limited as we go ahead,” U.P. Bhat, who manages 43 billion rupees at Canara Robeco Asset Management Co. in Mumbai, said by telephone. “Economic activity is unlikely to pick up before the second-half and banks may find it difficult to increase lending.”

Growth in Asia’s third-largest economy has slowed for two straight quarters, and the government forecasts an expansion of 7 percent in the fiscal year ending March 31, the weakest since 2003, after recording average annual growth of more than 9 percent in the previous three years.

In the most recent quarter, bond holdings buoyed both banks. At ICICI, income from treasury operations, which includes trading in bonds and currencies, climbed more than three-fold from a year earlier to 9.76 billion rupees. At State Bank, also based in Mumbai, treasury income jumped 51 percent climb to 60 billion rupees.

Diverging

In other areas, the performances of the two lenders diverged. State Bank’s deposits climbed 36 percent in the quarter, and advances rose 29 percent, with large companies’ borrowings rising 47 percent and retail credit increasing 27 percent.

ICICI’s deposits fell 9 percent to 2.09 trillion rupees. Advances dropped 1.3 percent, even as loan growth for Indian banks averaged 28 percent in the three months ended Dec. 31, according to central bank data.

State Bank’s gross non-performing assets as a percentage of loans shrank to 2.61 percent, from 2.82 percent a year earlier. The lender increased the funds set aside to cover defaults by 16 percent to 5.15 billion rupees.

ICICI increased its provisions by 33 percent to 10.1 billion rupees.

Bad Debts

“Banks will have to watch out for rise in bad debts, especially from the real estate sector,” said Canara Robeco’s Bhat.

ICICI last year racked up the largest losses tied to the global financial crisis among Indian lenders, leading to a run on the bank in September as depositors grew concerned about the company’s capital adequacy.

ICICI reduced operating expenses by 19 percent during the quarter, without specifying how it did so.

“ICICI will have to cut its rates to once again get competitive,” said R.K. Gupta, who manages 2.5 billion rupees at Taurus Mutual Fund in New Delhi including ICICI shares. Still, “the results are better than expected and will ensure that investor confidence isn’t shattered. The worst seems to be over for the bank.”

ICICI fell 64 percent in 2008, surpassing the 52 percent drop in the nation’s benchmark Sensitive Index and 42 percent decline in State Bank’s stock, as investors shunned the company on concern that it might record bigger losses on overseas investments tied to failed U.S. financial institutions.

ICICI fell 3.8 percent to 363.85 rupees on Jan. 23, valuing the company at 405 billion rupees. The shares have declined 19 percent this year. That compares with a 10 percent retreat in the Sensex.

State Bank declined 4.5 percent to 1,041.5 rupees on Jan. 23, valuing the company at 661 billion rupees. Like ICICI, its shares have fallen 19 percent in 2009.