Moody’s affirms State Bank of India’s ratings

Mumbai: Moody’s Investors Service has affirmed the ratings on State Bank of India’s local and foreign currency deposits of Baa3/P-3 apart from affirming the Baa3 rating on its senior unsecured debt issued through its London branch and the Baa3 rating on its medium term note programme. While retaining the ratings on Monday, the global ratings agency noted that since the merger of its associate banks in April, SBI’s asset quality deteriorated significantly, which is also due to the economic disruptions since last November.

At end-March 2017, the state-run lender’s gross NPA ratio jumped to 9% on a consolidated basis from 6.9% on a solo basis. Also at the end of June, the consolidated NPA ratio jumped further to 9.9%. But the agency sees some of the negative pressure on the asset quality as “one-off effect of the merger, and expects asset quality to remain broadly stable, because the bank has been proactive in recognising legacy credit issues, while it has de-risked its new origination book over the last two to three years.”

Moody’s also noted that a large proportion of these NPAs are under different resolution processes, and, as such, any resolutions can improve SBI’s asset quality metrics. It also warned that “there are still some downside risks to asset quality”. Within the corporate book, SBI has identified potential weak loans (the so-called watchlist loans) that could slip within this financial year which represent 1.3% of its gross loans as of Q1.

There are also risks emerging from its SME, retail and farm loan books and this was evident in the Q1 numbers with 60 per cent of its fresh slippages emerging from these segments. “But these risks are somewhat mitigated, given the bank’s loss absorbing buffers; specifically, its improving capitalisation and loan loss reserves. In June 2017, SBI raised Rs15,000 crore through a QIP issue. “As a result, by end June, it reported a common equity tier 1 ratio of 10.2%, up from 9.9% in March,” Moody’s said.

SBI also has access to a number of sources of capital, including the remaining 62.1% in its life insurance arm which is valued at about Rs43,500 crore and the potential capital injections from the government, as well as an ability to access the equity capital markets. Moody’s expects that SBI’s profitability to gradually improve, as credit costs come down.

Despite the asset quality issues, SBI’s operating profits have broadly remained stable, reflecting its strong core franchise which has strengthened further after the merger with associate banks and business diversification, as well as increased focus on businesses that generate higher return on capital, the global rating outfit said.

Moody’s also retained its baseline credit assessment of BA1 and its adjusted BCA of BA1 has also been retained by the agency coupled with the ratings on the nation’s largest bank’s foreign currency subordinated MTN and foreign currency junior subordinate MTN programme at Ba1 and Ba2. In addition, Moody’s affirmed SBI’s counterparty risk assessment of Baa3/P-3. Moody’s has affirmed all other short- term programme ratings at P-3.

The outlook on all the long-term ratings above is positive. The affirmation of SBI’s ratings as well as its BCA reflect Moody’s expectation that the bank’s financial profile will remain stable over the next 12-18 months.