KOLKATA - State Bank of India (SBI.BO), India's largest lender, reported a forecast-beating 45.6 percent rise in quarterly profit after gains from trading trebled and loan demand soared as borrowers scurried for funds in a slowing economy.

Pretax earnings from the bank's treasury operations, mainly from trading in bonds and other securities, jumped to 37.45 billion rupees ($760 million) from 12.31 billion rupees in the year to March 2008, it said in a statement.

The bank, which along with its associates controls a quarter of Indian banks' loans and deposits, did not provide quarterly figures for its treasury operations.

Our treasury did well. Our treasury, which was a residual one, has come into its own, chairman O.P Bhatt told a news conference.

State Bank, which has 11,000 branches in India and abroad, also gained from robust loan demand of 30 percent in 2008/09 after it slashed rates on mortgages, car loans and mid-corporate advances under government pressure to boost the economy.

The robust loan growth helped the lender shrink gross bad debts as a percentage of loans to 2.84 percent in the quarter, from 3.04 percent a year ago.

Bhatt expected loans and deposits, which jumped 38.1 percent in 2008/09, to grow by a quarter in the year to March 2010.

I don't think this momentum will continue as people will look at investing in the stock market and real estate, he said.

India's main share index .BSESN has risen 23.1 percent so far this year, after falling a record 52.5 percent in 2008, as global appetite for stocks increased.

Indian bank loans grew 17.3 percent in the 12 months to late March, lower than the 30 percent expansion in the previous three years, central bank data showed. It followed a curb on bank lending due to souring debts.

In value terms, State Bank's gross bad debts rose 21.4 percent on the year to 155.89 billion rupees in the January-March period as a downturn in the west hit Asia's third largest economy.

Bad debts or non performing loans are being closely monitored as corporate profits are hit by a slowing economy. Morgan Stanley expects Indian bank's gross bad debts to rise to 6.1 percent of advances by 2010/11, from 2.3 percent in 2007/08.

Private sector rival ICICI Bank (ICBK.BO), which last month reported a 35.3 percent fall in quarterly profit, said bad debts as a percentage of net advances in January-March rose to 1.95 percent from 1.5 percent a year ago. [ID:nBOM49189].

State Bank, which raised more than $4 billion through a rights issue in March 2008 will look at raising 20 billion rupees this year to fund expansion and meet loan demand.

The bank said January-March net profit was 27.42 billion rupees, up from 18.83 billion rupees a year ago. That beat a Reuters poll forecast of a net profit 21.9 billion rupees for the fiscal fourth quarter.

Net interest margins, a key measure of efficiency, fell to 2.9 percent in the year from 3.07 percent as it cut rates.

Shares in State Bank, which the market values at $17.1 billion, have risen 2.9 percent so far this year compared with a a 10 percent increase in the bank index .BSEBANK.

The shares ended 3.1 percent lower at 1,325.15 rupees on State Bank, which has 11,000 branches across India and abroad, has the lowest cost of funds among the nation's lenders. ($1=49.3 rupees)

(Writing by Narayanan Somasundaram; Editing by Peter Blackburn)

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