By Siddhi Nayak

MUMBAI (Reuters) -State Bank of India (SBI), the country's largest lender, on Saturday reported an unexpectedly steep 35% drop in net profit for the October-December quarter, weighed down by higher pension costs and wage revisions.

Net profit fell to 91.64 billion rupees ($1.1 billion) in its fiscal third quarter from 142.05 billion rupees in the same period a year earlier, SBI reported in a stock exchange filing.

Analysts had estimated a profit of 129.87 billion rupees for the quarter, according to LSEG data.

Profit was hit by a 71-billion-rupee provision for wage revisions and pension costs, the bank said.

SBI’s net interest income – the difference between interest earned and interest paid – rose 4.6% to 398.16 billion rupees. Net interest margins dipped by 35 basis points on-year and nine bps quarter-on-quarter to 3.34% due to deposit repricing.

Most Indian banks have reported a drop in net interest margins for the fiscal third quarter as deposits were repriced higher amid tight banking system liquidity conditions.

SBI has seen the peak of deposit rates and deposit repricing is mostly done, Chairman Dinesh Kumar Khara told reporters at a post-earnings press briefing in Mumbai. He pegged credit growth between 14-16% for this financial year..

SBI’s loans grew 14.38% on year, while deposits rose by 13.02%.

Gross non-performing asset (NPA) ratio was at 2.42% at December-end, which Khara said was the lowest in 10 years, from 2.55% at the end of the prior three months.

SBI is open to raise equity capital going forward, if the need arises, Khara said.

The lender is also open to acquire merchant accounts of Paytm after the RBI halted fresh business in Paytm Payments Bank, SBI said.

“Paytm’s settlement account is there with us,” Khara said. “So long as we don’t get any instruction from RBI on that account, we are open.”

(Reporting by Siddhi Nayak; Editing by William Mallard and Giles Elgood)