By Swati Pandey
MUMBAI (Reuters) - An increase in distressed loans, and the provisions to guard against them, are likely to eat into the profits of State Bank of India (SBI) this financial year and also hurt its smaller state-run rivals.
State-run SBI is India's largest lender and creditor to many major companies including Suzlon Energy and Lanco Infratech . These firms and others in the infrastructure and manufacturing sectors have been hit as Asia's third largest economy grows at its slowest pace in a decade and regulatory hurdles hinder foreign investment.
Indian banks will also have to contend with rising interest rates and a likely increase in bad corporate loans after the Reserve Bank of India (RBI) introduced monetary tightening measures this quarter to bolster the rupee, which fell to a record low against the dollar last week.
"I can't see why financial 2014 should get better for SBI. Today, the asset quality pressures are huge, not for SBI alone, for the entire banking sector," said ASV Krishnan, banking analyst for Ambit Capital.
The current financial year ends on March 31, 2014.
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A spurt of loan defaults and lower net interest income in the three months that ended June triggered the second consecutive drop in quarterly profit for SBI, sending its shares to their lowest since December 2011.
Most Indian state banks, including Bank of Baroda , Punjab National Bank and Bank of India Ltd also posted a spurt in bad loans.
SBI's loan troubles contrast with HDFC Bank , India's third largest private lender, which has maintained consistently strong growth due to its conservative lending strategies.
HDFC Bank's profits rose 30 percent in the first quarter, in line with its profit growth for every quarter in the last decade.
Net new additions to SBI's non-performing loans were around 90 billion rupees in the fiscal first quarter, above analysts' expectations of around 55-60 billion rupees.
Total bad loans were 5.55 percent of the bank's total book, up from 4.99 percent in the same year-ago period.
The bank had said in May it would restructure, or ease payment terms, on loans totalling up to $1 billion in 3-4 months. Figures for the June quarter were not available.
Last month, SBI's client Lanco started a process to restructure debt totaling $1.2 billion after economic weakness impacted the performance of some of its businesses such as power and engineering and construction.
"I expect the street to sharply downgrade earnings estimates for SBI for financial 2014. There is no catalyst for improvement," said Vaibhav Agarwal, banking analyst for Mumbai-based Angel Broking.
SBI missed estimates and posted on Monday a 13.6 percent drop in net profit to 32.41 billion rupees in the fiscal first quarter compared with 37.52 billion rupees a year ago.
Net interest income rose 3.5 percent to 115.12 billion rupees.
Analysts had expected a net profit of 36.2 billion rupees, according to Thomson Reuters I/B/E/S.
SBI shares ended down 3.5 percent at 1,605.35 rupees, after having dropped as much as 5.35 percent earlier.
(Reporting by Swati Pandey; Editing by Miral Fahmy)