Moody's says SBI rating may come under pressure

‘The challenge is to get value from investments made in infrastructure’.

State Bank of India (SBI), the country’s largest lender, which disappointed investors and analysts with its earnings for the fourth quarter of 2009-10, got a warning today from Moody’s, the global rating agency.

Moody’s said SBI’s rating would come under ‘some pressure’ if the government-owned bank’s bottom line did not improve.

The public sector bank reported only a marginal growth in net profit for 2009-10 . For the fourth quarter, net profit plunged 32 per cent year-on-year to Rs 1,867 crore, the first such drop in three years. This was attributed mainly to higher provisioning and increase in staff cost.

TURNING BAD Gross NPA (Rs crore)
Banks	Mar ’09	Dec ’09	Mar ’10	Chg	Chg (%)
SBI	15,714	18,861	19,535	3,821.00	24.32
BoI	2,471	4,187	4,883	2,412.00	97.61
IOB	1,923	3,218	3,611	1,688.00	87.74
Union Bank	1,923	2,092	2,671	748.00	38.87
PNB	2,507	3,156	3,214	708.00	28.22
IDBI Bank	1,436	2,317	2,129	694.00	48.32
BoB	1,843	2,260	2,401	558.00	30.27
Canara Bank	2,168	2,619	2,590	422.00	19.48
Axis Bank	898	1,174	1,318	420.00	46.81
Syndicate Bank	1,595	2,018	2,007	412.00	25.86
Top 10 banks on the basis of net change in Gross NPA for the period between Mar ‘10 and Mar ‘09 Compiled by BS Research Bureau                                               Source: Capitaline

“Moody’s cautions that a possible continuation of this trend over the short to medium term will exert some pressure on the bank’s currently stable outlook on its standalone ratings of ‘C-’ bank financial strength rating (BFSR), which maps to a baseline credit assessment (BCA) of Baa2,” the rating agency said.

Staff expenses of SBI in 2009-10 increased 30.9 per cent, mainly due to hiring of 27,000 employees. Other operating expenses increased 28.2 per cent as the bank continued its expansion by opening 1,049 branches and installing 7,788 automated teller machines in 2009-10. As a result, the cost-to-income ratio increased to 52.6 per cent from 46.6 per cent a year earlier.

“SBI’s main challenge now is to extract value and additional earnings from this heavy investment in both human resources and infrastructure, which, according to the management, has laid the foundation for future growth,” Moody’s said.

Provisions for bad loans in 2009-10 stood at Rs 5,148 crore, more than double last year’s, eating into operating profit by 28 per cent.

SBI's provisioning coverage ratio, including technically written-off accounts, rose to 59.2 per cent in March 2010 from 57 per cent in March 2009.

Though the absolute level of gross non-performing assets rose 24.3 per cent, the gross NPA ratio was only marginally higher at 3.05 per cent from 2.86 per cent in 2008-09. Moody's noted the net NPA ratio was contained at 1.72 per cent from 1.79 per cent the year before.

Moody's viewed negatively the additional loan restructuring of Rs 3,800 crore during the fourth quarter of 2009-10, thus bringing the total of restructured loans to Rs 26,800 crore, comprising 4.2 per cent of total loans as on March 2010.