SBI net profit was Rs 3,955 crore ($556 million) for the third quarter ended December 31.

State Bank of India beat expectations and posted its highest quarterly profit in nearly seven years on Friday, as the country's biggest lender by assets set aside lower provisions for bad loans and asset quality improved.

Its net profit was Rs 3,955 crore ($556 million) for the third quarter ended December 31, versus a loss of Rs 2,416 crore a year ago, and analysts' expectations for a profit of Rs 3,208 crore, according to Refinitiv data.

This is the bank's biggest quarterly profit since it reported a bottomline of Rs 4,050 crore in the March quarter of 2012.

In the current quarter, SBI's provisions for bad loans dropped 21.3 per cent to Rs 13,971 crore from a year earlier, the bank said in a stock exchange filing.

A write-back on provisions made for mark-to-market losses helped total provisions drop 68.2 per cent. Net interest income grew 21.4 per cent to Rs 22,691 crore, driven by healthy growth in loans.

SBI, which accounts for more than a fifth of the country's banking assets, saw its gross bad loans as a percentage of total loans ease to 8.71 per cent at end-December, from 9.95 per cent in the previous quarter and 10.35 per cent in the year-ago period.

In absolute terms, its gross bad loans eased from the previous quarter to Rs 1.88 lakh crore, helped by a slowdown in slippages.

SBI shares, which rose 3.1 per cent after the results, reversed course to trade 2.1 per cent lower by 2:11 pm.