MARC AFFIRMS ITS AA RATING ON STATE BANK OF INDIA’S RM500 MILLION BONDS

Mar 15, 2013 -

MARC has affirmed its AA rating on State Bank of India’s (SBI) Senior Unsecured Bonds of RM500 million with a stable outlook. The rating reflects SBI’s very high systemic importance as the largest bank in India, its robust market franchise, stable income generation, strong liquidity position and the likelihood of external support from its majority shareholder, the Government of India (GOI). Since MARC’s last rating action on March 2, 2012, the credit quality of SBI’s loan book has weakened further, as evidenced by the increase in the bank’s non-performing loan (NPL) ratio as of end-December 2012. MARC believes that SBI’s challenging domestic operating environment, in particular India’s general economic slowdown and high interest rates, will pose challenges to meaningfully improving the bank’s asset quality over the next 12 to 18 months.

The AA rating on SBI’s bonds is at the same level as MARC’s foreign currency debt ceiling for India, reflecting the rating agency’s view that the bank would be vulnerable to a deterioration in the domestic macroeconomic and operating environment as most of its operations are in India. In MARC’s view, India’s country risks, sovereign’s creditworthiness and corresponding transfer and convertibility (T&C) risk are closely correlated. MARC’s affirmation of SBI’s rating at the foreign currency debt ceiling for India also factors in SBI’s reliance on the GOI for capital injections to support its credit growth, which inextricably links SBI’s creditworthiness with that of GOI.

The stable outlook on India’s foreign currency debt ceiling is mirrored in SBI’s stable rating outlook for the bonds which are scheduled to mature on March 29, 2013.

SBI is the largest commercial bank in India with a 16% market share for loans and advances. It has an extensive network of 14,388 domestic and 178 international offices/branches spread across 34 countries as of December 2012. The bank’s market reach is supported by various alternative channels such as internet and mobile banking as well as automatic teller machines (ATM). SBI’s large and diversified client base and extensive branch network continues to underpin its leadership position in the Indian banking system. During the nine months to December 31, 2012 (9MFY2013), the bank’s gross loans increased 16% year-on-year to Rs10,091.1 billion (December 2011: Rs8,693.9 billion), driven by strong growth in large corporate and agricultural lending and international advances.

Despite significant competition in the deposits market, the bank managed to sustain its market share in domestic deposits at 16.5% as at end-December 2012 (end-December 2011: 16.3%). Total deposits grew 15.6% year-on-year in 9MFY2013 mainly attributable to an 18.9% growth in term deposits. The bank saw slower growth in its low-cost current and savings account (CASA) deposits of 9.8%, resulting in lower CASA as a percentage of total deposits at 45.5% as of end-December 2012 compared to 47.5% a year earlier. The bank is expanding its branch network to shore up its low-cost deposits and protect net interest margins (NIMs) and is targeting the low- and middle-income group to bring in more CASA deposits.

For 9MFY2013, SBI’s net profit was Rs108.1 billion, up 41.1% from the corresponding period of the preceding year. Higher interest income, aided by loan growth, and smaller provisions enabled the bank to post a higher net profit. Net interest income increased by 4.9% to Rs332.5 billion (9MFY2012: Rs317.0 billion). Meanwhile, provisions for non-performing assets declined to Rs73.9 billion during the period compared to Rs87.1 billion for 9MFY2012 in spite of the bank’s rising gross NPLs. Its return on assets (ROA) and return on equity (ROE improved to 0.95% and 15.6% respectively (9MFY2012: 0.79% and 14.17% respectively).

SBI’s asset quality remains under pressure, as indicated by its rising gross and net NPL ratios. As at end-December 2012, SBI’s gross and net NPL ratios deteriorated to 5.30% and 2.59% respectively, compared to 4.61% and 2.22% respectively as of end-December 2011. The bank’s gross NPL was significantly higher than the banking system’s reported gross NPL ratio of 2.9% as of March 2012. Fresh slippages during 9MFY2013 increased to Rs261.3 billion compared Rs225.5 billion in 9MFY2012; the incremental slippages were mostly from the SME and mid-corporate segments. SBI’s loan loss reserves covered 61.49% of its gross NPLs at end-December 2012 compared to 68.10% of gross loans as of end-March 2012 and 62.52% as of end-December 2011. This leaves the bank with a reduced cushion to absorb credit losses.

The GOI has been making repeated capital contributions to SBI’s equity base to support its capitalisation and growth. During 4QFY2012, SBI received capital injection from the GOI of Rs79 billion which increased its Tier 1 CAR and total CAR to 9.79% and 13.86% respectively as of end-March 2012 (FY2011: 7.11% and 11.98% respectively). However, the bank’s credit growth has been outpacing its internal capital generation, as a result of which SBI’s Tier 1 CAR and total CAR fell to 9.50% and 13.05% respectively as of end-December 2012. The bank is expecting further capital support of Rs40 billion from the government to support the capital adequacy of the bank. MARC opines that the bank will continue to depend on capital injections from the GOI to maintain its target Tier 1 and total CAR of 8% and 12% respectively in the coming quarters.

Contact:

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.