Bloomberg News

Bearish State Bank of India Bets at Record High on Bad Loans

December 20, 2011

Dec. 15 (Bloomberg) -- Bearish futures bets on State Bank of India, the nation’s biggest lender, are at a record high amid concern a rise in bad loans will erode profits.

Open interest, or the number of outstanding contracts held by traders, totaled 75,169 in State Bank at 11:16 a.m. in Mumbai, the highest since 2002 when the futures started trading, according to data compiled by Bloomberg.

Non-performing assets at the biggest Indian lender rose to 4.19 percent of total debt last quarter, from 3.35 percent a year earlier. Bad-loan provisions jumped 35 percent to 29.2 billion rupees ($538.9 million) in the same period. The Reserve Bank of India has increased borrowing costs 13 times since 2010 to 8.5 percent to damp consumer prices, curtailing lending by banks. State Bank shares have slumped 38 percent this year, the eighth worst-performing stock on the BSE India Sensitive Index.

“Traders are building massive short positions on State Bank amid fears a rise bad loans will crimp profits,” Indrajit Sen, a derivatives analyst with Mumbai-based Fortune Financial Services India Ltd., said in a phone interview. “Slipping growth momentum, high borrowing costs and rupee depreciation is raising concerns some debtors may fail to repay loans.”

Moody’s Investors Service downgraded the outlook for India’s banking system last month to “negative,” saying a domestic economic slowdown and the surge in borrowing costs will boost bad loans.

State Bank had its financial strength rating cut by the ratings provider in October on inadequate capital buffers and rising non-performing credit. The Bankex Index, the nation’s main gauge of banking stocks, has lost 27 percent this year.

The lender will cancel untapped lines of credit and reorganize its balance sheet to boost the amount of available funds as it waits for an injection of capital from the government, Chairman Pratip Chaudhuri said in an interview on Dec. 12.

“Higher cost of capital, a slowdown in growth, and foreign-exchange volatility are likely to result in a further rise in non-performing loans,” analysts at Morgan Stanley led by Hong Kong-based Chetan Ahya wrote in a research note dated Dec. 12.

--Editors: Matthew Oakley, Allen Wan

To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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