SBI profitability may stay under pressure for 6-8 quarters: Moody's

Global ratings agency Moody's today said that country’s largest lender the State Bank of India's (SBI) profitability metrics could face lingering pressure as it spends the next six-eight quarters for rebuilding its balance-sheet buffers.

In contrast, its private sector counterpart, ICICI Bank, whose operating profitability has improved significantly, allows it to absorb a higher level of credit costs.

While flagging pressures on SBI’s profitability, the ratings agency did point out to stablisation of underlying asset quality.

“We believe that recent developments provide further confirmation that it has moved past the worst of its latest asset cycle," says Alka Anbarasu, Moody's Vice President and Senior Analyst.

SBI's new impaired loan formation has slowed. This development is a sign that, barring new adverse shocks, its delinquencies in this cycle have peaked.

"By contrast, ICICI's asset quality has deteriorated over the last few quarters, and corporate loans will remain under pressure as some of its corporate customers show weak debt servicing metrics," said Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

Vadlamani explains that ICICI exhibits a meaningful exposure to large corporates, and that the exposure represents a key source of risk for the bank's asset quality.

On the issue of loss-absorbing buffers, Moody's says that such buffers for SBI are weak, and that SBI's profitability will remain under pressure, as the bank seeks to rebuild its buffers.

In fact, a key weakness of SBI's credit profile is its thin loss-absorbing buffers, making its profit metrics highly sensitive to the credit-loss cycle.

SBI reported a jump in credit costs to 2.2% of growth loans in the third quarter ended 31 December 2015 for the current fiscal year ending 31 March 2016 (FYE 2016) compared to 1.5% in FYE 2015.

This situation consumed 81% of SBI's pre-provisioning income and reduced its annualized return on assets to 0.21% from 0.68% over the same periods.

By contrast, ICICI demonstrates significant buffers to withstand a meaningful deterioration in its asset quality.

ICICI has seen significant improvement in its core operating profitability over the last few years, with its pre-provision income (PPI)/average assets increasing to 3.18% in FY15 from 1.91% at FY09.

The increase in ICICI’s core profitability was driven by structural improvement in its funding profile, as well as higher net interest margins and better cost-to-income ratios, it said.