State Bank of India’s (SBI) performance for the June quarter left the street disappointed on Friday as asset quality deteriorated and margins contracted. The country?s largest lender reported a net profit of R3,750 crore, up 137% year-on-year, but net interest margins (NIMs) stayed flat y-o-y and contracted 32 basis points sequentially to 3.6%. With net non-performing assets (NPAs) rising 40 basis points sequentially to 2.2%, the SBI stock fell 4.26%, closing at R1,887.95 on the Bombay Stock Exchange.

Although the bank restructured loans worth only R564 crore in the three months to June, chairman Pratip Chaudhuri said about R3,000 crore worth of debt was pending restructuring. In the March, 2012 quarter, SBI had recast loans worth R5,130 crore.

As a share of total assets, the bank?s gross NPAs rose 50 basis points sequentially to 4.99%; in absolute terms gross NPAs stood at R47,156 crore, up from R27,768 crore in the year-ago period. The management claimed the June quarter had been an aberration, saying the trend would reverse in the coming quarters. ?We had expected slippages to peak in Q2 and Q3 of last year and did not expect gross NPAs would increase so much. However, we believe there could be a reversal in the coming quarters due to upgrades of some large corporate accounts,? Chaudhuri said. The management conceded, however, that there was some amount of pressure in the agricultural sector because of the drought-like situation in some pockets.

Slippages occurred in the mid-corporate and small and medium enterprise segments pushing up the net NPAs to R20,324 crore in the June quarter from R12,435 crore in the corresponding period a year ago. Among the additions to NPAs were accounts of a large construction company, a drug firm and a power major.

Morgan Stanley observed that the results were weak, pointing out that the NIMs had come off 32 basis points sequentially versus its estimate of 10 basis points.

SBI?s cost of funds rose even as yields remained under pressure.

The brokerage said both the adjusted net interest income (NII) as also the core fee income had come in below its estimates. SBI?s NII, or the difference between interest earned and paid out, was up 14.63% at Rs 11,119 crore. Non-interest income was subdued with a 1% decline to Rs 3,499 crore due to a mark to market hit on its investments. ?In our view the bank is likely to go through a period of slowing revenues, lower margins and higher credit costs,? Morgan Stanley wrote in a note.

SBI?s loan book grew 20% y-o-y in the quarter to Rs 7,88,153 crore, led mainly by strong performances in the large corporate and agricultural advances segments. The bank expects to grow its advances book including credit substitutes like commercial paper by 16-17% in the fiscal. The deposit base increased by 16.09% y-o-y to Rs 11,02,926 crore. Its CASA or current account savings account ratio was down by 179 bps at 46%. Its capital adequacy ratio of the bank stood at 13.17% with a tier-1 capital of 9.38%.