Moody’s downgrade highlights asset quality issues in a slowing environment.
Focusing on a sub-par capital base compared to its peers and added stress from a deteriorating asset quality in a slowing environment, ratings agency Moody’s downgraded SBI’s standalone credit rating. It deemed SBI’s 7.6 per cent Tier-I capital (reported last quarter) insufficient to support growth and absorb the rising cost of an expected further deterioration in asset quality. A higher projected fiscal deficit means any hopes of a capital infusion by the government this year looks remote.
However, asset quality pressure over the next few quarters for the sector at large is widely acknowledged and there is a big question mark on SBI’s capital-raising plans as well, something it needs to get fixed to fund growth beyond that in the current financial year. So, it’s not surprising that SBI’s stock has underperformed peers and the broader markets in the last six months—it is down 30 per cent against a 22 per cent fall in the BSE Bankex and an 18 per cent decline in Sensex.
So, why did the news result in the stock tanking over four per cent on Tuesday, bringing down other banking stocks as well? “The Moody’s downgrade could push funding costs marginally higher,” believes A V Krishnan, research analyst at Ambit Capital, who points out that confidence in sovereign backing for Indian banks allowed them to raise funds at an attractive 350-400 basis points over Libor rates (London interbank offer rates averaged 0.83 per cent in September). In spite of the standalone tag to the rating downgrade for SBI, this could have a ripple effect, hurting funding costs across the sector, he feels.
For SBI particularly, while the planned infusion of fresh capital through a rights offer would take SBIs Tier-I capital ratio to 9.3 per cent, Moody’s pointed out that this would be inadequate to sustain a compounded annual growth rate of 15 per cent in loans beyond the next three years. Credit costs (higher provisions) on continued slippages would be a further drain and a stress situation with gross non-performing assets (NPAs) at 12.07 per cent could push up capital requirement to Rs 37,400 crore to retain an eight per cent Tier-I ratio.
However, this is an extreme situation no one is seeing, says Agrawal, who feels that slippages will escalate incrementally not exponentially. Vaibhav Agrawal, banking analyst, Angel Broking, expects gross NPA levels to rise by 50-100 bps, to 4-4.5 per cent by FY13. Krishnan sees GNPA at 4.1 per cent in FY12 and rising in FY13 to 7 per cent, compounded by slowing credit growth. Some others see it rising to five per cent in FY13.
The market is concerned the higher credit costs would eat into earnings, lowering capital accretion and credit growth outlook further.
The stock's fall came with two per cent lowering of consensus book value per share estimates, which leaves it trading at about 1.55 times FY12 and 1.34 times FY13 estimates at current levels.
