It's axiomatic that, during booms, financial entities grow quicker than the real economy.

But sometimes there are special circumstances at play. Until 2003, Indian interest rates were artificially high. When rates dipped, most banks booked huge profits on high-interest portfolios.

That party ended only after the real economy started picking up. Credit offtake has climbed through 2004-05 but rates have also risen marginally. Banks have hiked provisioning to reduce NPAs and to hedge against investment losses in case rates rise further.

It is with all this in mind that one suggests State Bank of India's [Get Quote] Q3 2004-05 (October-December 2004) performance was impressive.

SBI recorded a 19.5 per cent y-o-y growth in net profits in Q3,2004-05 with Rs 1,099 crore (Rs 10.99 billion) NP against Rs 919 crore (Rs 9.19 billion) in Q3, 2003-04. It recorded a 32 per cent increase in net interest income to Rs 3,660 crore (Rs 36.6 billion) versus Rs 2,773 crore (Rs 27.73 billion).

In the first nine months of 2004-05, total advances rose 29 per cent. The average yield on advances declined to 7.75 per cent from 8.32 per cent.

But interest on advances climbed 21.04 per cent and expenses on deposits declined 11.29 per cent.

PBT for treasury operations jumped to Rs 663.13 crore (Rs 6.63 billion) versus Rs 338.62 crore (Rs 3.39 billion) as SBI sold longterm paper and reduced the average tenor of its government securities holdings from over 4 years to 3.92 years by December 2004.

There was a focus on retail. In April-December 2004, retail advances grew by Rs 10,431 crore (Rs 104.31 billion) or 31 per cent. By December 2004, retail advances constituted 25.2 per cent of gross advances against 22 per cent in December 2003.

Housing loans constituted 53.5 per cent of retail advances.

Total deposits were up 16 per cent and the cost of deposits dipped to 4.74 per cent in April-December 2004 from 5.65 per cent in April-December 2003. Gross NPAs dropped to Rs 12,794 crore (Rs 127.94 billion) {Rs 13,846 crore (Rs 138.46)}, while net NPAs were at Rs 4,812 crore (Rs 48.12 billion) {Rs 4,075 crore (Rs 40.75 billion)}.

In percentage terms, net NPAs fell to 2.56 per cent from 2.96 per cent (end-September 2004). Provisioning was hiked to Rs 1,710 crore (Rs 17.1 billion) {Rs 707 crore (Rs 7.07 billion)}, including provisioning for NPAs at Rs 791 crore (Rs 7.91 billion) {Rs 400 crore (Rs 4 billion).

The capital adequacy ratio was 12.66 per cent, down from 14.74 per cent -- another sign of growing credit offtake.

Apart from core operations, SBI's other income also rose because of a one-off Rs 146 crore (Rs 1.46 billion) in profits booked on the sale of a 37 per cent stake in SBI Fund Management to Societe Generale.

Fee-based incomes also rose 25 per cent in the nine-month period.

The 19.6 per cent y-o-y rise in net profit is probably understated because there was an extremely low tax provisioning in Q3, 2003-04. After adjusting for the stake sale in SBI Funds, adjusted PBT was up 40 per cent y-o-y.

The market seems to have decoded these numbers. At Rs 650-odd, the share has risen some Rs 70 from pre-result levels. Is it still a buy? Well, if rates don't spike, SBI should beat the market through 2005-06 in terms of growth.

Two more quarters of similar provisioning could reduce net NPAs to 1.5 per cent level. And there might be another short-term trigger as and when sector FII limits are raised.