Moody’s Investors Service has affirmed the long-term local and foreign currency deposit ratings of State Bank of India (SBI) at Baa3.
The deposit ratings of SBI are at the same level as India’s Baa3 sovereign rating. At the same time, Moody’s has downgraded SBI’s baseline credit assessment (BCA) and adjusted BCA to ba2 from ba1.
As a result, Moody’s has also downgraded SBI’s foreign currency preferred stock non-cumulative medium-term note programme rating to (P)B2 from (P)B1, and the rating of the preferred stock non-cumulative (Basel III compliant additional tier 1 securities) bond issued out of its DIFC branch to B2(hyb) from B1(hyb).
Moody’s has maintained SBI’s rating outlook where applicable as negative in line with the outlook on India’s sovereign rating.
This rating action concludes the review initiated on SBI’s BCA, adjusted BCA, junior securities and the junior securities of its London, Hong Kong, DIFC and Nassau branches initiated on June 2.
Moody’s said the economic shock from coronavirus pandemic will exacerbate an already material slowdown in India’s economic growth, weakening borrowers’ credit profiles and hurting Indian banks’ asset quality.
Prolonged financial stress among rural households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of bank’s balance sheet over the past two years.
The downgrade of SBI’s BCA to ba2 from ba1 reflects Moody’s view that the bank’s asset quality and profitability will deteriorate. The resultant weakening in an internal capital generation will reverse improvements in the bank’s financial metrics achieved over the past two years.
Prior to the review for downgrade, Moody’s had expected that improvements to SBI’s asset quality and profitability will result in financial metrics in line with global peers with ba1 BCAs.
SBI’s asset quality improved in the quarter ended June with its gross non-performing loan ratio declining to 5.4 per cent from 7.5 per cent a year ago. However, the ratio is potentially understated because it does not include loans on which the bank has granted payment deferrals.
As of June, about 9.5 per cent of SBI’s loans were under a repayment moratorium until the end of August.
Moody’s views SBI’s capitalisation — as measured by tangible common equity relative to adjusted risk-weighted assets of 8.5 per cent as of March — low when compared to similarly rated global peers.
While SBI’s stakes in listed subsidiaries present potential sources of capital, Moody’s expects that the bank’s sustainable capitalisation will be lower than global peers in line with the expectation of the bank’s management.
SBI’s ba2 BCA takes into account the bank’s strong funding and liquidity a result of its dominant market position and its important links to government transaction-related businesses which support its stable funding franchise. As of the end of March, SBI’s liquidity coverage ratio was healthy at 134 per cent.