SBI’s bad loans didn’t affect it much. Here’s the proof

State Bank of India reported its highest profit in six quarters on lower provisions for bad loans last quarter, but investors were wary about the outlook for its asset quality after the amalgamation of its five subsidiary banks from April.

SBI, which accounts for more than a fifth of India’s banking assets, merged its five subsidiary banks with itself and also took over a niche lender to women from April 1, in the sector’s first consolidation move.

The bank on Friday reported standalone net profit, not including contributions from subsidiaries, more than doubled from a year earlier to 28.15 billion rupees ($433.5 million) for its fiscal fourth quarter to March 31. While the profit surge was in line with expectations, SBI surprised the market with lowering of its bad-loan ratio on a quarter-on-quarter basis.

However, including the results of the subsidiary banks it has now taken over, the bank reported a consolidated net loss of about 33 billion rupees in the March quarter, stoking concerns that higher bad-loan ratio at the subsidiaries could weigh on the overall balance sheet.

It also guided for a jump in a “watch list” of potential trouble loans to 324.27 billion rupees to account for the consolidated entity beginning April 1, compared with 133 billion rupees for the parent bank.

SBI Chairman Arundhati Bhattacharya told a news conference that the bank had already taken the “maximum amount of pain” regarding the merger of the subsidiaries and made complete provisions wherever required, although she expected overall provisioning costs to remain “elevated” in the year to March 2018.

“The near term, there might still be a little more pain … Slightly longer-term, things are definitely on the upswing,” said Bhattacharya.

Faster resolution of a record $150 billion of soured assets in India’s banking sector is a key focus for Prime Minister Narendra Modi’s government, which owns majority stakes in 20-plus lenders that dominate the sector.

This month, the government tweaked its laws, giving the central bank greater power to identify and enforce resolution on specific soured loans.

For the three months to March, SBI’s provisions for bad loans fell 9.4 percent from a year earlier to 109.93 billion rupees for the parent bank. Gross bad loans as a percentage of total loans fell to 6.9 percent in March from 7.23 percent in December, although rose on an absolute basis to 1.12 trillion rupees.

Investec Securities said in a note after the results that the parent bank’s profit beat estimates but called the consolidated loss of 33 billion rupees a massive miss. It said the results reflected its concerns of weak profitability at the merged bank, retaining its “hold” rating on the stock.

“We continue to believe that the RoEs of the consolidated bank will remain below 8-9 percent which is reflected in the current valuations,” the brokerage said.

Shares in SBI rose as much as 4 percent after the results, but pared some gains to close 1.7 percent up in a flat Mumbai market.