Mumbai: State Bank of India’s (SBI’s) strong performance in the fourth quarter has failed to cheer investors because of the large stock of bad loans of its associate banks that the bank inherited after their merger with it.

Shares of SBI, India’s largest lender, closed at Rs294.40 each at close on BSE, 4.46% lower than their previous close.

The shares dipped 4.8% to Rs293.25 in intraday trades. BSE’s benchmark Sensex index rose 0.35% to 30,570.97 points.

SBI merged five of its associate banks with itself, effective 1 April.

In the three months to March, SBI reported a net profit of Rs2,814.82 crore but the merged entity reported a net loss of nearly Rs3,000 crore because of around Rs6,000 crore of losses that the associate banks reported, according to calculations by brokerage Jefferies.

In the period between 1 April and 31 December 2016, the five associates lost Rs5,905 crore.

According to analysts at Motilal Oswal Securities, the losses at the associates were driven by the harmonization of their accounting policy, especially in terms of asset quality, with that of SBI.

Other ratios of the merged entity were also poor, compared with the standalone numbers of SBI.

Consolidated gross non-performing assets (NPAs) ratio was at 9.11%, higher than 6.90% of the stand-alone entity.

In absolute terms, gross NPAs of the standalone entity was at Rs1.12 trillion at the end of March. The consolidated gross NPA was Rs1.79 trillion.

SBI added Rs4,000 crore of bad loans in the three months to March. The associate banks (and other businesses such as credit cards and the lender’s overseas subsidiaries) added Rs11,000 crore.

Similarly, capital adequacy ratio and provision coverage ratio of the merged entity was at 12.85% and 61.53%, respectively, lower than 13.11% and 65.95% of the stand-alone entity.

Brokerage Ambit Capital said in a report to its investors that it was greatly disappointed with the decline in the aggregate loan book and asset quality stress of associate banks even as the numbers for the stand-alone bank were in line with its expectation.

It maintained a “sell" rating on the stock but did not change its target price of Rs250 a share.

On Friday, SBI chairman Arundhati Bhattacharya said there was going to be “little more pain in the near term" and that credit costs, a percentage of provisioning against the total advances, would remain “slightly elevated" in the current year as the processes of resolving stressed asset accelerates.

In 2016-17, the SBI group had to set aside Rs61,290.88 crore as loan provisions.

For associate banks, this number was likely around Rs25,298 crore, according to Mint’s calculations.

This is a derived number and some part of the provisions may include those related to insurance and credit card businesses. However, a large share of the provisions are related to the associate banks.

The management has guided for a higher credit cost in the current financial year and expects normalisation only in the next fiscal; it has also said that margins may remain under pressure because resolution of large stressed loans may require sacrifice and upfront provisioning to cover those losses, Ambit Capital said.

SBI revised its consolidated watch-list of stressed loans to Rs32,427 crore from Rs13,310 crore on a stand-alone basis as at the end of December.

According to brokerage Nomura, around Rs10,000 crore of this is attributed to the five associate banks.