Moody’s downgrades SBI’s standalone profile on asset quality concerns

Mumbai: Moody’s Investors Service on Tuesday downgraded State Bank of India’s (SBI) baseline credit assessment (BCA) by one notch from ba1 to ba2 citing an expected deterioration in asset quality and profitability.

“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 internal capital generation will reverse improvements in the bank’s financial metrics achieved over the past two years,” the rating agency said in a statement.

As a result, Moody’s said, it has also downgraded SBI’s foreign currency medium term note (MTN) program 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).

According to the agency, the economic shock from the coronavirus pandemic will exacerbate an already material slowdown in India’s economic growth, weakening borrowers’ credit profiles and hurting Indian banks’ asset quality.

Moreover, a prolonged financial stress among rural households, weak job creation and a credit crunch among non-banking financial companies (NBFCs) will lead to a rise in non-performing loans, delaying the ongoing clean-up of bank’s balance sheet over the past two years.

India’s largest bank reported a gross bad loan ratio – non-performing loans as a percentage of total loans – of 5.44%in the June quarter of FY21, down from 7.53% in the same period last year. Its capital adequacy ratio stood at 13.4% in the three months to June.

Moody’s said that SBI’s gross bad loan ratio is potentially understated because it does not include loans on which the bank has granted payment deferrals. As of June 2020, about 9.5% of SBI’s loans were under a repayment moratorium until the end of August 2020.

However, the Reserve Bank of India (RBI) has allowed banks to restructure loans to borrowers whose earnings and businesses have been impacted by the pandemic.

“In line with the trend for other Indian peers, Moody’s expects SBI to restructure loans. However, uncertainty around the length and depth of India’s economic slowdown make it difficult to estimate what portion of restructured loans will eventually turn into non-performing loans,” it said.

Moody’s said it views SBI’s capitalization as 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,” it said.

Meanwhile, the rating agency 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.

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