Standard & Poor’s on Wednesday lowered the standalone credit profile of two state-owned lenders, the State Bank of India (SBI) and the Union Bank of India, citing concerns over their asset quality and high credit cost.
“We revised the standalone credit profiles of SBI and Union Bank because we expect the banks’ asset quality to remain weak and credit costs to stay high,” said S&P in a note. The international ratings agency expects the banks’ asset quality to remain stressed in the financial years 2012-13 and 2013-14, partly due to continued slippages in their restructured loan books. The standalone credit profile of SBI has been lowered to ‘BBB-’ from ‘BBB’ and that of Union Bank has been lowered to ‘BB+’ from ‘BBB-’ level.
Basically, the credit profile of a bank reflects its standalone ability to repay the funds borrowed. The credit rating of a bank is arrived at after taking into account its standalone credit profile and other factors affecting its performance. In such cases, the probability of government backing has come to the banks’ rescue since their long term credit ratings have been affirmed at ‘BBB-’ level. “We believe that there is a very high likelihood that the government of India would provide timely and sufficient extraordinary support to all these banks in the event of financial distress,” said S&P.
The SBI’s gross non-performing loans (NPL) ratio of five per cent (on a standalone basis) as of June 30, 2012, is the highest among the Indian banks, rated by S&P. The agency noted SBI’s mid-corporate and agriculture portfolios are particularly stressed. While Union Bank’s NPLs in agriculture have surged, its exposure to power sector also faces challenges such as fuel shortages, delays in environmental clearances and slow pace of tariff reforms.
S&P also affirmed the long-term credit ratings of Bank of India, IDBI Bank, Indian Overseas Bank, Indian Bank and Syndicate Bank at ‘BBB-’ with a ‘negative’ outlook. The standalone credit profiles of these five banks stand unchanged.
