UPDATE 1-State Bank of India raises $1.2 bln in share sale-sources
* Falls short of $1.5 bln target in equity sale
* Issue priced at 1,565 rupees, low end of indicative band
* Rate hike, state banks' asset quality worries hit demand (Adds shares sale details, comments)
MUMBAI, Jan 29 (Reuters) - State Bank of India raised $1.2 billion through a share sale, sources with direct knowledge of the deal said, falling short of its $1.5 billion target and clouding the outlook for equity offerings by other banks in a slowing economy.
India's biggest lender, which accounts for a quarter of the country's loans and deposits, plans to use the proceeds to boost its domestic and overseas banking operations.
Investors, both foreigners and domestic, bought roughly 50 million shares out of nearly 59 million on offer at 1,565 rupees ($24.98) each, the lower end of the price band, the sources said on Wednesday.
Demand for SBI shares, particularly from foreign investors, was not strong because of concerns about the bank's asset quality and earnings growth as an economic slowdown curbs demand for loans, three sources with direct knowledge of the situation said.
Indian banks, mainly state-run such as SBI and Punjab National Bank with high exposure to the power and infrastructure sectors, have seen a sharp surge in bad loans in the past couple of years.
The Indian central bank's surprise move on Tuesday to raise policy interest rates by a quarter percentage point to 8.00 percent also dented investor demand for SBI shares, the sources said.
Foreign investors, typically the biggest buyers of Indian shares in such offerings, bought about $250 million in SBI shares, while state financial institutions including Life Insurance Corp of India Ltd were the biggest buyers, the sources said.
"The timing of the issue was not right. The overall market sentiment turned weak in the last few days, and the rate hike by the central bank is also negative for banks," said Jagannadham Thunuguntla, chief strategist at SMC Global Securities.
"State-run banks have not been on the investors' radar for quite some time due to asset quality worries," he said. "This will now put pressure on the government to infuse more capital into the public sector banks."
In September, Moody's Investors Service downgraded its rating of SBI's senior unsecured debt to Baa3, the lowest investment-grade rating, from Baa2. It changed its outlook on SBI's financial strength to 'negative' from 'stable', citing worsening asset quality and dependence on a fiscally strapped government to maintain its capital base.
CAP ON INVESTORS
A recent directive by the market regulator to cap the allotment of shares to a maximum of 49 institutional investors in an equity offering also contributed to SBI's falling short of its target, two separate sources with direct knowledge said.
All the sources declined to be identified ahead of a public announcement. SBI Chairwoman Arundhati Bhattacharya could not immediately be reached for comment.
A large number of Indian companies including state banks have delayed their share sales due to poor investor sentiment and sluggish corporate earnings growth.
India's main stock market index is down 2.5 percent this year. SBI stock lost more than a quarter of its market value in 2013 and is down nearly 11 percent this year.
Citigroup, HSBC, JPMorgan, Bank of America Merrill Lynch, Deutsche Bank, UBS AG and SBI Capital, the investment banking unit of State Bank of India, managed the SBI offering.
($1 = 62.6550 Indian rupees) (Reporting by Sumeet Chatterjee; Editing by Anupama Dwivedi and Jane Baird)
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