MARC LOWERS DEBT RATING OF STATE BANK OF INDIA TO AA FROM AA+ FOLLOWING METHODOLOGY REFINEMENT; OUTLOOK STABLE

Mar 2, 2012 -
MARC has downgraded the State Bank of India’s (SBI) Senior Unsecured Bonds of RM500 million to AA from AA+ following the incorporation of transfer and convertibility (T&C) risk into the ratings of ringgit-denominated debt issuances by foreign issuers. The outlook is stable.
Under the refined methodology, MARC’s approach going forward will be to cap the ratings of non-sovereign foreign issuances at the relevant foreign currency ceiling unless there is compelling evidence to suggest that the issuer can be assured of unimpeded access to foreign currency needed for debt service under a scenario in which the sovereign is facing a foreign currency-generated liquidity crisis. MARC’s downgrade of SBI’s bond rating does not reflect deterioration in the rating agency’s sovereign credit rating on the Government of India (GOI). The rating agency had not previously incorporated T&C risk into SBI’s debt rating.

The downgrade aligns SBI’s debt rating to MARC’s national scale rating on the Indian sovereign which also operates as the ‘rating floor’ for systemically important Indian banks. MARC considers that SBI is materially exposed to GOI’s sovereign credit risk due to its significant exposure to government securities and the domestic operating environment. SBI’s credit strengths continue to include its dominant market position as India’s largest commercial bank, its solid access to customer funding and its high likelihood of receiving government support in the event of need. The recent weakening of SBI’s asset quality metrics and capitalization is partly offset by the bank’s track record of profitable operating performance, and expectation of improving capital strength in the near-term.
The stable outlook on the rating is primarily driven by MARC’s stable rating outlook on the ‘AA’ foreign currency country ceiling for ringgit-denominated debt issued by Indian issuers. In light of the interplay between MARC’s bond rating on SBI and the rating agency’s foreign currency country ceiling on India, the issue rating of the majority state-owned financial institution and corresponding rating outlook are expected to be primarily driven by MARC’s rating on the Indian sovereign. A change in the foreign currency country ceiling on India will necessitate a review of SBI’s bond rating to the extent that a downgrade will trigger a lowering of SBI’s bond rating while an upgrade could support a higher rating on SBI.

SBI operates with an extensive network of 13,772 domestic and 174 international offices/branches spread across 33 countries as at December 31, 2011. As India’s oldest and largest bank, it possesses an entrenched and stable franchise with a market share of between 16.2% and 16.5% in domestic deposits and loans as at December 31, 2011. Over the past few years, SBI has been steadily expanding its international operations; foreign operations contributed 5.7% and 11.6% of the bank’s revenue and assets respectively for the financial year ended March 31, 2011 (FY2011). SBI’s expanding international operations offer increased asset diversification.

SBI’s liquidity remains healthy; the bank continues to benefit from a stable deposit base and a moderate loan to deposit ratio of 84.6% as of end-December 2011. In FY2011, SBI’s net loans expanded by 19.8% (FY2010: 16.5%) while its deposits increased 16.1% (FY2010: 8.4%). The bank’s current and savings accounts (CASA) to deposits ratio remained favourable at 47.5% as at end-December 2011. SBI’s strong CASA ratio continues to be viewed as a positive rating factor, particularly in a rising interest rate environment as witnessed by the Indian banking system in the 2011 calendar year. The bank’s reported interest spread widened during the first half of FY2012. SBI’s holdings of liquid assets were 26.3% of total assets as at end-December 2011 (FY2011: 28.9%).

SBI’s return on assets (ROA) has exhibited a declining trend since FY2010; after-tax profit growth has been affected by higher credit costs and staff cost increases. Provisions for non-performing assets (NPAs) net of write-backs amounted to Rs87.9 billion or 34.7% of pre-provision operating profit in FY2011, and remained elevated at Rs87.1 billion or 39.6% of pre-provision operating profit for the first nine months of FY2012. The higher loan loss provisioning was necessitated by the upward trend in gross NPAs as well as tightened regulatory loan loss provisioning requirements. Staff costs, meanwhile, rose 13.5% in FY2011 as a result of higher gratuity and pension provisioning in addition to increased staff strength. In 9MFY2012 (April 2011 to December 2011), provisions for superannuation benefits moderated to Rs24.2 billion from Rs31.3 billion in 9MFY2011. SBI’s resilient core profitability and growth in its net interest income has allowed the bank to absorb the high provisioning costs and write-offs in recent periods relatively well. However, SBI will require capital infusion in the near term to maintain the growth momentum in its net interest income.

SBI has experienced asset quality deterioration, as indicated by rising gross and net NPA ratios. SBI’s reported gross non-performing loan (NPL) ratio rose to 4.61% as at end-December 2011 from 3.17% a year ago. SBI’s net NPA ratio stood higher at 2.22% as at end-December 2011 compared to 1.61% a year ago. Fresh slippages in the three months to December 31, 2011 (Q3FY2012) remained high at Rs81.61 billion (Q2FY2012: Rs80.16 billion), with the bulk coming from large corporate and mid-corporate accounts linked to sectors such as iron and steel, metal and mining, textiles, real estate and agriculture. Slippages from its restructured loan book stood at Rs96.83 billion. MARC notes that SBI was earlier given a one-year extension by the Reserve Bank of India (RBI) to September 2011 to achieve a provision coverage ratio (PCR) of 70%. Since then RBI has relaxed the requirement; SBI’s PCR was 67.25% as at end-June 2011 against the required 70%, but has since dropped to 62.52% as at end-December 2011.

SBI’s Tier-1 capital adequacy ratio (CAR) and total CAR of 7.59% (FY2010: 9.45%) and 11.60% (FY2010: 13.39%) respectively as at end-December 2011 are currently weak for its rating level, largely as a result of the Rs79.27 billion of pension liability provisions charged to its capital reserves in FY2011. MARC takes comfort from the fact that the GOI approved an Rs79 billion capital infusion into SBI on the January 31, 2012. The capital infusion, which is expected to take place during the current fiscal year, will take the form of a preferential allotment of shares to the GOI and would raise Tier 1 capital to about 8% and the government’s shareholding in SBI to around 65%.

Contacts:
Lim Mei Ching, +603-2082 2267/ meiching@marc.com.my;
Milly Leong, +603-2082 2275/ milly@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.