UPDATE 2-State Bank of India posts steepest quarterly profit fall in over 2 years
* Net profit down 35 pct to 23.75 bln rupees vs est. 27 bln rupees
* Net NPL ratio 2.91 pct in September qtr vs 2.83 pct in previous qtr
* Net new bad loans lower vs previous qtr (Adds comments from bank's chairwoman)
MUMBAI, Nov 13 (Reuters) - State Bank of India (SBI) posted its steepest quarterly profit fall in more than two years as nonperforming loans increased, underlining the difficulties the bank's first chairwoman faces in keeping a lid on deteriorating assets.
Indian state banks, with their high exposure to the power and infrastructure sectors, have been hammered by the economic slowdown. Punjab National Bank, the third-biggest state lender, posted lower-than-expected earnings last week.
At the same time, helping to fuel speculation that the bad loans weighing on state banks may be easing, smaller rivals Bank of India Ltd and Canara Bank Ltd reported a drop in non-performing assets as of the end of September.
SBI's new chairwoman was less sanguine. "We don't see that stresses have improved," said Arundhati Bhattacharya, who was elevated to the top job at SBI last month. "Stress is great on the mid-corporates side."
SBI said on Wednesday that net profit slumped 35 percent to 23.75 billion rupees ($373 million) in the quarter ended September. That undershot analysts' average expectations of about 27 billion rupees.
Net nonperforming loans, as a percentage of total assets, rose to 2.91 percent, from 2.83 percent in the preceding quarter.
Yet shares in SBI rose more than 3 percent in Mumbai trading as the pace of bad loan growth slowed.
SBI, which accounts for a quarter of India's loans and deposits, said net new bad loans fell over 39 percent from the previous quarter. Net interest margin, a key gauge of profitability for banks, rose to 3.51 percent.
"The guidance generally is that fourth-quarter onwards, things should improve, but we need to see tangible signs of that," said Nitin Kumar, banking analyst at local brokerage Quant Broking.
"The macro is still challenging, inflation is high, there could be more interest rate hikes and the ability of banks to pass on higher costs to borrowers is limited. So, we need to see sustainable signs of improvement," Kumar said.
The Indian economy is expected to grow 5 percent in the year ended March, a far cry from near double-digit growth in 2008. Last month, annual consumer price inflation quickened more than expected to 10.09 percent from 9.84 percent in September, driven by food and fuel prices.
Bhattacharya will be under pressure to tame nonperforming loans and reverse weakening profit growth while helping to reassure investors who have pulled down SBI's shares by almost half since a peak in November 2010 as the economy lost momentum.
At the post-earnings media briefing, Bhattacharya declined to give any earnings guidance for the remaining two quarters of the financial year.
"I don't believe stressful times are over yet," said P. Phani Sekhar, fund manager at Angel Broking. "We will see over the next two quarters how SBI performs and then see where shares are and if we can add SBI to our portfolio."
The stock trimmed its intraday gains to end 1.44 percent higher, compared with the 0.43 percent drop in the benchmark BSE index.
SBI, seeking to raise funds to strengthen its capital base, has sought government approval to issue additional shares. SBI has said it needs at least 150 billion rupees, including retained profit, a year to meet loan demand.
"We have sought approval from the government to raise 8,000 to 9,000 crore (80-90 billion rupees). We will go to the market once those approvals are in place," Bhattacharya said. "We are expecting these approvals before March 31."
SBI's plan to raise funds through a rights issue has been in the works for more than three years, constrained by delays in government approval and poor market conditions.
The government has already agreed to inject 20 billion rupees into the bank in the financial year ending in March 2014.
In September, ratings agency Moody's downgraded its outlook on SBI's financial strength rating to 'negative' from 'stable' on worsening asset quality and dependence on a fiscally strapped government to maintain its capital base.
SBI has a board-approved mandate to maintain its tier-I capital ratio at over 9 percent. The ratio is currently at 8.73 percent. ($1 = 63.6375 Indian rupees) (Reporting by Swati Pandey; Editing by Ryan Woo)