Moody's has also affirmed the ratings for the banks' foreign currency subordinated MTN and foreign currency junior subordinate MTN program of (P)Ba1 and (P)Ba2.
The rating for the bank's preferred stock (non-cumulative) of B1(hyb) has been affirmed.
The bank's Counterparty Risk Assessment (CR Assessment) of Baa3(cr)/P-3(cr) is also affirmed.
All other short-term program ratings have been affirmed at (P)P-3.
The outlook on the bank's long-term deposit and senior unsecured debt (issued out of the London Branch) is positive.
RATINGS RATIONALE
More From This Section
SBI has struggled with poor asset quality since 2011, when the rate of GDP growth in India (Baa3 positive) fell to under 9%. In particular, high corporate leverage and stalled infrastructure projects led to rising levels of non-performing loans (NPLs) and restructured loans.
Nevertheless, given the amount of bad loans that SBI has recognized over the years, Moody's believes the bank's asset quality will not come under significant pressure.
The key remaining asset quality challenges for SBI is its exposure to highly leveraged corporate groups that remain classified as standard assets, despite the groups showing weak debt-to-EBITDA and interest coverage ratios. Part of this issue was addressed by the asset quality review conducted by the Reserve Bank of India in December 2015. The review pushed SBI to reflect some of this exposure in its NPLs. Following the review, SBI's reported NPL ratio increased to 5.1% at 31 December 2015 from 4.25% at 31 March 2015. Moody's expects SBI to register a gross NPL ratio of around 6.0% for the year-ending 31 March 2016.
Moody's points out that beyond the recognition of the remaining stressed exposure, SBI's underlying asset quality should stabilize. For example, SBI's new impaired loans formation rate has fallen since quarter ended December 2014 except for the quarter ended 31 December 2015 and at a faster pace than other Indian public sector banks. In addition, SBI has shown a greater bias towards better rated Indian corporates in its new loan originations.
A key weakness of SBI's credit profile is its thin loss absorbing buffers.
In December 2015, he bank's reported provisioning coverage was at 65% down from 69% at end-March 2015 -- a level which is much lower than similarly rated global peers. Given the uncertainity surrounding the corporate asset quality, credit cost will continue to remain high and pose as a key drag on the bank's profitability levels until NPL formation rate comes down further.
Despite the pressure on its profits, Moody's expects that SBI can maintain its capitalization levels, such that its CET1 ratio will register around 9.0%-9.5% for the fiscal year ending 31 March 2017, because of its strong core earnings (pre-provisioning profits) compared to other public sector banks, which should help the bank absorb potential provisioning expenses. Furthermore, the bank has access to internal and external sources of capital, including capital infusion from the Government of India.
The affirmation of the ratings also take into account SBI's strong liquidity and funding position. As the largest bank in India by assets and deposits, SBI accounts for around 16% of system loans and 17% of system deposits as of end-June 2015. The bank has a nationwide reach, through 16,377 bank branches and 55,768 group ATMs. We expect these factors to reinforce SBI's long-running competitiveness in terms of its franchise, funding and liquidity positions.
WHAT COULD CHANGE THE RATINGS -- UP
SBI's deposit ratings and ratings of senior unsecured debt issued out of the London branch, could be upgraded if India's sovereign rating of Baa3 is upgraded.
WHAT COULD CHANGE THE RATINGS -- DOWN
SBI's BCA could face downward pressure if: (1) its NPL ratio increases substantially from current levels; and/or (2) if its core earnings fall and impacts its ability to support an increase in credit costs.
Additionally, any indications that support from the Government of India has diminished or that additional capital requirements may arise beyond the government's budgeted amount could put the bank's ratings under pressure.
Any downward changes in the sovereign's ceilings could also affect the bank's ratings.
Taking into account today's announcement on SBI's ratings, the bank's ratings are as follows:
State Bank of India
Local currency deposit rating affirmed at Baa3/P-3; outlook on the long-term rating is positive
Foreign currency deposit rating affirmed at Baa3/P-3; outlook on the long-term rating is positive
Other short-term program rating affirmed at (P)P-3
Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3
Foreign currency subordinated MTN program rating affirmed at (P)Ba1
Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2
Pref. stock (non-cumulative) rating affirmed at B1(hyb)
BCA and Adjusted BCA affirmed at ba1
CR Assessment affirmed at Baa3(cr)/P-3(cr)
State Bank of India, Hong Kong Branch
Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3
Foreign currency subordinated MTN program rating affirmed at (P)Ba1
Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2
Other short-term program rating affirmed at (P)P-3
CR Assessment affirmed at Baa3(cr)/P-3(cr)
State Bank of India, London Branch
Foreign currency senior unsecured debt rating affirmed at Baa3; outlook on the senior unsecured debt rating is positive
Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3
Foreign currency subordinated MTN program rating affirmed at (P)Ba1
Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2
Other short-term program rating affirmed at (P)P-3
CR Assessment affirmed at Baa3(cr)/P-3(cr)
State Bank of India, Nassau Branch
Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3
Foreign currency subordinated MTN program rating affirmed at (P)Ba1
Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2
Pref. stock (non-cumulative) rating affirmed at B1(hyb)
Other short-term program rating affirmed at (P)P-3
CR Assessment affirmed at Baa3(cr)/P-3(cr)
Powered by Capital Market - Live News