Tuesday, October 4, 2011

Moody’s downgrades SBI's standalone rating to ‘D+’


Rating agency Moody’s has downgraded State Bank of India’s financial strength rating (BFSR) or standalone rating to ‘D+’ from ‘C-’. The revised rating maps to a baseline credit assessment (BCA) of Baa3.
As a result of the lower BCA, the Hybrid debt rating was downgraded to Ba3(hyb) from Ba2(hyb).
The revised BFSR carries a stable outlook and the Hybrid rating a negative outlook. 

Ratings Rationale
“The rating action considers SBI’s capital situation and deteriorating asset quality. Our expectations that non-performing assets (NPA) are likely to continue rising in the near term — due to higher interest rates and a slower economy — have caused us to adopt a negative view on SBI's creditworthiness,” says Ms Beatrice Woo, a Moody's Vice-President and Senior Credit Officer.
SBI reported a Tier 1 capital ratio of 7.60 per cent as of June 30, 2011. The level pushes the bank into a lower rating band. In addition, it was below the 8 per cent Tier 1 ratio that the Government of India has committed to maintaining in public sector banks and substantially lower than those of other ‘C-’ rated Indian banks. The latter includes banks such as Axis Bank (Ba1; C-/Baa2; stable), HDFC Bank (Ba1; C-/Baa2; stable), and ICICI Bank (Ba1; C-/Baa2; stable).
Finally, such a level for its Tier 1 capital ratio provides an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality.
“Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the Government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank’s limited ability to manage its capital,” says Ms Woo.
“And given that a bank's ability to freely access the capital markets is an important rating criterion globally, we therefore believe a lower BFSR for SBI is warranted, especially as these circumstances are likely to recur,” says Ms Woo.
The Rs 23,000 crore rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30 per cent. However, we estimate that capital deployed for loan growth, assuming 15 per cent per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8 per cent, thereby necessitating another capital exercise.

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