Fitch Ratings has today assigned a 'BBB-'rating to State Bank of India's senior unsecured USD bonds to be issued under the bank's USD5bn Medium-Term Note programme. The size and pricing of the issue is expected to be finalised today. The agency has simultaneously affirmed the outstanding ratings of State Bank of India (SBI) as follows:
- Long-term foreign currency Issuer Default rating (IDR) at 'BBB-';
- Short-term foreign currency IDR at 'F3';
- National Long-term rating at 'AAA(ind)';
- Individual at 'C' ;
- Support at '2'; and
- Support Rating Floor at 'BBB-'.
The Rating Outlook is Stable. The list of outstanding issues rated is attached below.
SBI's Long-term ratings are driven by its quasi-sovereign risk status and huge systemic importance, as well as its competitive edge as India's largest domestic bank with an extensive branch reach, strong deposit franchise, above-average capital ratios and better income diversity compared to other government banks. The Long-term foreign currency IDR is at the Support Rating Floor level.
Funding is mostly through domestic retail deposits sourced from its pan-Indian branch network (the largest amongst Indian banks), which supports the bank's liquidity. SBI also has a major share of the banking business of the central government and the various state governments, which helps boost its share of low cost current and savings deposits, versus other Indian banks. The bank's reported Tier 1 capital ratio has been above 8% since FY98; the ratio was at 9.7% at end-June 2009 and comprised mostly of core capital. Given the statutory minimum shareholding that the government needs to maintain in the bank, SBI would ultimately rely on the government for capital; the government subscribed to the bank's rights issue of common equity in March 2008.
The rapid loan growth in recent years (loans doubled between FY06 and FY09), together with the economic slowdown leads to asset quality concerns, and the bank's NPL and stressed accounts could rise in FY10 and FY11. That said, the sector diversity of SBI's loan portfolio provides some respite against sudden spikes in the NPL ratios; Fitch notes that the bank's reported gross NPL ratio and restructured loan portfolio at end-June 2009 were both close to the average for Indian banks. Fitch's stress test on Indian banks (for more information please refer to the Special Report titled "Stress Test on Indian Banks: Higher-Rated Banks Mostly Able to Preserve Equity" dated 1 October 2009) suggests that SBI's credit costs in the stress scenario can be absorbed by its pre-impairment operating profit, leaving the capital unimpaired under fairly harsh stress assumptions.
That said, the bank's performance in FY10 could come under pressure on several fronts. SBI's focus since FY09 on regaining market share in its lending business has affected its net interest margin (NIM), and while NIM can be expected to recover as deposits are re-priced at rates lower than 2008, it may remain lower than the targeted 3% (Q1FY10: 2.3%). Credit costs would likely rise during the current downturn in asset quality; in addition, the bank also plans to raise its currently low specific loan loss reserves level (FY09: 38%) closer to the system average of 50% of gross NPL. Profits could also be impacted if interest rates result in mark-to-market losses on its available-for-sale portfolio of government securities, which needs to be adjusted through profits under local accounting. The healthy accretion of fee income from both the banking business provides comfort and helped maintain ROA close to 1% during Q1FY10.
With over 11,000 branches and 8,500 ATMs, SBI continues to dominate the banking sector in India.
A report on this entity will be available shortly on the agency's subscription website, www.fitchresearch.com.
Issue Ratings of SBI:
- EUR100m senior bonds: 'BBB-';
- USD500m senior bonds: 'BBB-';
- USD300m senior bonds: 'BBB-'; and
- USD400m perpetual non-cumulative Tier 1 bonds rated: 'BB';
Fitch Ratings currently maintains coverage of approximately 6,000 financial institutions, including over 3,200 banks and 2,200 insurance companies. Finance & leasing companies, broker-dealers, asset managers, managed funds, and covered bonds make up the remainder of Fitch Ratings’ financial institution coverage universe.
Fitch India has Five rating offices located at Mumbai, Delhi, Chennai, Kolkata and Bangalore. Fitch is recognised by Reserve Bank of India, Securities Exchange Board of India (SEBI) and National Housing Bank.
