Mumbai: The country’s largest lender State Bank of India (SBI) on Thursday reported a 42.03% rise in net profit for the quarter ended June, riding on higher treasury income and a substantial write-back of provisions related to its investment portfolio.

Its net profit stood at Rs2,330 crore, against Rs1,641 crore in the year-ago quarter.

Top show: SBI’s O.P. Bhatt says the relatively lower NPA coverage was because the bank’s asset quality is ‘healthier’ than that of other banks. Abhijit Bhatlekar/Mint

SBI’s stock closed 4.01% up at Rs1,722.80 on the Bombay Stock Exchange even as the Bankex, the index of banking stocks, rose 2.2% and the benchmark Sensex rose 1.41%.

Also Read SBI net rides on investments, depreciation write-back

“The key positive in the results was the...sequential decline in net NPA (non-performing assets) levels," said Rajiv Mehta, banking analyst at India Infoline Ltd, a Mumbai-based brokerage.

SBI’s net NPAs, as a percentage of advances, rose to 1.55% against 1.42% a year ago, but down from 1.76% in the March quarter, even though the economic slowdown in the January-March quarter was acute.

However, this must be seen in the context of large-scale restructuring of loans by the bank. SBI has restructured about Rs8,100 crore of loans in the June quarter in addition to Rs11,000 crore it had done in the March quarter.

Borrowers have requested restructuring of loans worth Rs21,000 crore. In an interview with television channel CNBC-TV18, SBI chairman O.P. Bhatt said he expects 50% of restructured loans to become standard assets in the next six months. A standard asset is a healthy loan that earns interest.

The Reserve Bank of India has allowed banks to restructure loans to support their borrowers during the economic downturn.

While the sequential drop in NPAs is good news, the bad news is a drop in SBI’s net interest margin (NIM)—the difference between what a bank earns on its loans and spends on deposits.

SBI’s NIM dropped to 2.30 percentage points, from 3.03 percentage points a year ago.

The bank’s interest income from advances rose 23.40%, but interest expenses grew by 38.59% on an “unprecedented" growth in deposits.

Deposit grew 35.90% to Rs7,63,563 crore in the past year, while advances rose 22.79% to Rs5,49,793 crore.

Interest expenses increased, said an SBI release, “as a result of unprecedented growth in deposits, signifying customer preference for (the) SBI brand. For a time, SBI was getting deposits at Rs1,000 crore per day".

In its aggression to garner deposits, SBI focused mainly on term deposits on which the bank pays higher interest. The share of low-cost current and savings accounts as percentage of total deposits dropped to 38.45%, from 41.87% a year ago. Banks do not pay interest on current accounts and pay 3.5% on savings accounts.

“Excess liquidity in the balance sheet has taken a toll on its NIM. However, it will get better when loan growth picks up in the second half of fiscal year," said Saikiran Pulavarthi, an analyst with Centrum Broking Pvt. Ltd.

Bhatt said SBI’s NIM will improve by four-six basis points in the second quarter as the cost of deposits will come down from 6.30% to 6.16%. One basis point is one-hundredth of a percentage point.

SBI set aside Rs1,234.24 crore to take care of bad debts; a year ago when it had written back provisions of Rs247.40 crore made earlier.

However, the bank’s total provisions, which include both funds set aside for bad loans and depreciation in its investment portfolio, are much lower as it managed to write back Rs1,201 crore, related to its exposure in equities and mutual funds as the stock market had its best quarter in 17 years.

As a result of this, SBI’s total provisions in the quarter fell to Rs172.73 crore, from Rs1,549.47 crore a year ago.