MUMBAI: State Bank of India, the country's biggest lender, beat market expectations with a 15 per cent rise in third-quarter net profit, helped by growth in credit demand and interest income.

But net non-performing assets of the bank, the lead lender to a number of troubled companies including Air India and Kingfisher Airlines, unexpectedly rose, dampening investor hopes that its asset quality had stabilised.

“They have disappointed in terms of asset quality, but that can be put down to Kingfisher,” said Manish Agarwalla, banking analyst at MF Global Sify Securities in Mumbai.

SBI shares, which were down 3.5 per cent before the release of the results, were off two per cent near the close of trading.

Non-performing assets rose to 2.22 per cent of the total from 1.61 per cent a year earlier.

State-run SBI reported a net profit of 32.6 billion rupees for the three months to Dec. 31, up from 28.3 billion rupees a year earlier. Net interest income rose 26.7 per cent from a year earlier to 114.7 billion rupees.

Analysts, on average, had expected a 10 per cent rise in net profit to 31.2 billion rupees, according to Thomson Reuters.

SBI, which was downgraded by Moody's Investors Service in October because of its thin capital base and worsening asset quality, said gross advances rose 17.5 per cent from a year earlier to 8.7 trillion rupees at the end of December.

Its net interest margin, a key gauge of profitability, rose to 4.05 per cent in the nine months to Dec. 31 from 3.61 per cent in the same period a year earlier, the bank said.

The bank is counting on a government capital infusion of $1.6 billion in the current fiscal year ending March 31, but has said it needs double that amount to maintain its capital adequacy ratio as it grows.

SBI's large private rivals, including ICICI Bank, HDFC Bank and Axis Bank, have also posted better-than-expected quarterly earnings, allaying some concerns about the asset quality of India's banks.

Although some smaller state-run banks disappointed investors, larger Punjab National Bank and Bank of Baroda, did better than most analysts had expected.

Concern about rising bad loans in Asia's third-largest economy prompted Moody's to cut its outlook for the Indian banking sector to negative from stable in November.

High deposit rates and slowing loan growth are putting pressure on bank margins after the Reserve Bank of India raised interest rates 13 times between March 2010 and last October.

SBI shares, which fell 42 in 2011, were down two per cent at 2,128.9 rupees at 3:15 pm.