Bank’s overseas borrowing cost to rise; SBI chairman downplays move.
Moody’s Investors Service on Tuesday cut the stand-alone rating of State Bank of India, flagging concerns over capital and rapid deterioration in asset quality at the country’s biggest bank.
The agency cut its rating on SBI’s financial strength to D+ from C-, while it also lowered its hybrid debt rating on the bank to Ba3 from Ba2, following the reduction in financial strength rating.
The revised stand-alone rating carried a stable outlook and the hybrid rating a negative outlook, Moody’s said.
Analysts said the downgrade would make SBI’s overseas borrowings a costly affair. It will also affect other banks as SBI is seen as a representative of the Indian banking system. Predictably, the rating downgrade upset investors, who sent the bank’s shares down to a 52-week low of Rs 1,751 intra-day. They recovered some of the losses, but closed at Rs 1,786, down 4.1 per cent, on the Bombay Stock Exchange.
Higher provisioning against bad loans has been weighing on SBI’s earnings.In the April-June quarter, the bank’s bad loans, as a percentage of total advances, reached a three-year high of 3.52 SBI chairman Pratip Chaudhuri tried to calm frayed nerves, saying the bank’s rating was in line with other major state-run banks, despite the downgrade. “D+ maps to Baa3, which is still investment grade.
| SBI’S STAND-ALONE QUARTERLY NUMBERS Net profit (Rs crore) | ||
| Gross NPA Rs crore | NIM (%) | |
| Sep-10 | 23,204.59 | 3.43 |
| Dec-10 | 23,437.75 | 3.61 |
| Mar-11 | 25,326.29 | 3.07 |
| Jun-11 | 27,768.28 | 3.62 |
| NIM: Net interest margin; Source: Capitaline Compiled by BS Research Bureau | ||
Other public sector banks such as Bank of Baroda, Punjab National Bank and Bank of India are also at D+. “We were the only exception, so far,” he said. Chaudhuri said the downgrade concerned only a small segment of the bank’s debt.
A Moody’s statement attributed to Beatrice Woo, vice-president and senior credit officer, says: “The rating action considers SBI’s capital situation and deteriorating asset quality. Our expectations that non-performing assets (NPA) are likely to continue rising in the near term — due to higher interest rates and a slower economy — have caused us to adopt a negative view on SBI’s creditworthiness.”
With a Tier-1 capital (equity and reserves) of 7.6 per cent of risk assets as on June 30 — well below the government’s commitment of eight per cent in public sector banks — Moody’s finds it is not good enough to fund growth and provision for bad loans in a deteriorating economic climate. The Rs 23,000 crore rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.3 per cent. However, Moody’s estimates that capital deployed for loan growth, assuming 15 per cent per annum for the next three years, will cause the Tier-1 ratio to fall below eight per cent, thereby necessitating another capital exercise.
Against a backdrop of a slowing economy and higher interest rates, the rising trend evident in SBI’s new NPA formation rate since the third quarter of FY11 will continue. Therefore, Moody’s expects SBI’s potential credit costs will be relatively high in the near term. NPA — as a percentage of the bank’s Tier-1 capital ratio — is now about 43 per cent.
Moody’s said, “Notwithstanding our expectations that SBI’s capital ratios will soon be restored through a capital infusion by the government, SBI’s efforts to secure this capital for the better part of the year demonstrate the bank’s limited ability to manage its capital.”
“Given that a bank’s ability to freely access the capital markets is an important rating criterion globally, we therefore believe a lower BFSR for SBI is warranted, especially as these circumstances are likely to recur,” said Woo.
Private broking entity ICICI Securities said it expected the near-term cost of funds to rise, particularly overseas borrowing rates. These external borrowings, as on FY11, are just seven per cent of the total funding liabilities i.e. deposits plus borrowings.
Deutsche Bank said in a research note the rating downgrade could potentially have some impact on SBI's overseas borrowings. But, these are just five per cent of the total liabilities.
G A Nadaf, a director on the SBI board and union leader, said the downgrade was not a good thing for the bank. The fresh capital infusion must become a priority for the government, he said.
