State Bank of India (SBI) posted its weakest profit growth in three years on

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Monday. India's largest bank reported a flat net profit of Rs 2,479 crore for the third quarter ended December 31, 2009 against Rs 2,478 crore a year ago, weighed down by a substantial increase in bad loans (non-performing assets or NPAs), a build up of excess liquidity of a whopping Rs 75,000 crore and a loss from treasury operations.

The bank's consolidated net profit for the third quarter of 2009-10 was Rs 3,305 crore, down 8.4 per cent from Rs 3,608 crore a year earlier.

The bank managed to maintain a year-on-year growth in loans at 19 per cent. The net interest margin also dipped to 2.83 per cent from 3.10 per cent a year ago due to a 125 basis points reduction in the bank's prime lending rate (PLR) since last year. The net profit for the nine-month period ended December 31, 2009 rose 14.43 per cent to Rs 7,299 crore from Rs 6,379 crore a year earlier.

“We hope to protect our NIM and take it up to 2.90 per cent but we will not be able to push it beyond this. The carrying cost for this excess liquidity is about Rs 215 crore and Rs 600 crore in loss of interest income during the quarter as it is being parked in the reverse repo window of the RBI (at 3.25 per cent), instead earning an interest rate of over 8 per cent had we channelised for commercial lending,” said OP Bhatt, chairman and managing director of SBI.

Bhatt also said that the bank will require Rs 10,000-20,000 crore of equity capital in 2010-11 and the bank expects the government to contribute 60 per cent of the requirement to retain its shareholding at the current level.

The total income of the bank rose marginally to Rs 21,145.40 crore during the quarter from Rs 20,305.90 crore a year earlier. Its core fee income was up by 36 per cent to Rs 581 crore. The other income was muted due to Rs 237 crore decline in the profit on sale of investments.

SBI's interest expenses on deposits were contained in the third quarter, as about Rs 2,90,000 crore of deposits have been priced downward by 163 basis points during the period. The bank has also reduced its bulk deposits by Rs 64,600 crore but this has been replaced by Rs 59,638 of retail deposits. Another Rs 15,000 crore of bulk deposits will come up for repricing during the quarter.

The gross NPAs of the bank increased by 48 per cent to Rs 18,861.17 crore during the quarter from Rs 12,722 crore in the same period previous year. The increase in NPAs during the quarter was Rs 1,485 crore as there were fresh slippages amounting to Rs 2,621 crore. NPAs include Rs 790 crore of written-off and upgraded loans. The bank recovered a Rs 346 crore of NPAs during the quarter.

Of the Rs 16,000 crore of restructured accounts, about Rs 996 crore slipped into NPAs, which is 6 per cent of the total accounts, leading to a spurt in corporate NPAs, but retail NPAs have been reduced to Rs 238 crore during the quarter from Rs 728 crore of retail NPAs in the second quarter.

The rise in yields on government securities resulted in the treasury income dipping by Rs 300 crore during the quarter from the same time last year. While the expenditure rose to Rs 16,527.26 crore from Rs 15,823.27 crore in the year-ago period.

The gross advances of the bank were up by Rs 97,581 crore, a growth of 19.15 per cent to Rs 6,07,154 crore from the corresponding period last year. “We expect to disburse another Rs 25,000 crore to Rs 30,000 crore during this quarter. We may end the year with a loan growth at the RBI projected figure of 18 per cent,” added Bhatt.

The SBI scrip closed at Rs 2,093.35, up Rs 3.15, or 0.15% over previous closing price. The market cap stood at Rs 1,32,902.65 crore.