Mumbai: State Bank of India (SBI), the country’s biggest bank, said the global rating downgrade by Moody’s Investors Service will have a negligible impact on borrowings, while acknowledging that the move increased the urgency with which capital needs to be raised, as the stock slumped to a two-year low.
Chairman Pratip Chaudhuri said the lowering of the state-owned bank’s banking and financial strength rating to D+ from C- on Tuesday applied to its perpetual debt, which the bank has no intention of raising more of in the future.
“We have $625 million of perpetual debt, which has a call option in 2017, but the new Basel-III norms no longer recognize perpetual debt as tier-I capital so there are unlikely to be any future issuances,” he said at a press briefing in Mumbai.
Moody’s cited “modest capital and weakening asset quality” for the downgrade. SBI’s bad debts, as a percentage of advances, reached a three-year high of 3.52% on 30 June against the industry average of 2.3% on 31 March, the rating agency said.
Chaudhuri pointed that the agency hadn’t mentioned the drop in the bank’s net bad loans to 1.61% from 1.63%.
“Bad loans have increased for the whole banking system, but we have also done some recoveries in the quarter ended September, including Rs400 crore from a state power utility,” he said. “Our net interest margins have also improved to 3.62% from 3.5% and is likely to surpass that number in the second quarter of this year. So not everything is going wrong.”
Perpetual bonds were introduced in 2006 to allow banks raise funds to meet credit demand and fulfil Basel-II capital adequacy rules without diluting the equity base. They do not mature, but banks have a call option after 10 years to retire the bonds. If they don’t exercise the option, the interest payment rises by a maximum of one percentage point. Indian banks are currently guided by Basel-II banking norms and are expected to move to stiffer Basel-III norms in 2013.
Chaudhuri said the downgrade brings the rating to the level of emerging market peers such as Industrial and Commercial Bank of China and China Construction Bank.
Some borrowings will become more expensive.
“It will increase rates on medium-term borrowings by 2 basis points (bps). The overseas market is stiff for everyone currently, be it Indian banks or European banks,” he said, adding that 10-year money, which cost the bank 70 bps over the London interbank offered rate (Libor) in 2007, is now 300 bps above Libor. One basis point is one-hundredth of a percentage point.
On 22 September, SBI had announced an increase in its foreign bond offering to $10 billion from $5 billion. In July 2010, SBI had raised $1 billion from the overseas market at 4.50%.
The downgrade may help by increasing pressure on the government to infuse more capital into the bank, a plan that has been delayed for more than a year.
“The rating change has not told us anything new about the bank, but there is no doubt this will make the government move more quickly in providing capital,” said Kajal Gandhi, assistant vice-president at ICICIdirect.com, the retail broking arm of ICICI Securities.
ICICIdirect.com has a buy call on the stock but slashed its target price to Rs2,200 in September from Rs2,700 earlier. The stock dropped 4% on Wednesday to close at a two-year low of Rs1,715.30 on BSE. The benchmark Sensex lost 0.46% to close at 15,792.41. The 14-share banking index, the Bankex, lost 2.52%, dragged down by SBI, which had fallen 4.08% on Tuesday.
Chaudhuri said SBI has given the government various options to infuse between Rs14,000 crore and Rs21,000 crore to increase the bank’s tier-I capital adequacy ratio to the stipulated 8% level. SBI’s tier-I capital, or core capital comprising equity and reserves, currently stands at 7.60%.
One of the options is a Rs20,000 crore rights offering. With the government holding at 59.4%, it will need to spend about Rs12,000 crore to maintain its stake at that level. That won’t be easy for the cash-strapped government.
“It would be nicer if the downgrade did not happen but from every crisis comes something good and we hope that this time it is government funds,” said Diwakar Gupta, chief financial officer at SBI.
SBI expects between Rs3,000 crore and Rs10,000 crore to come from the government in this financial year—by either December or March, Chaudhuri said.
“We expect all of the money to come not in one day but in tranches over the next five years,” he said.
The government has budgeted Rs6,000 crore as capital infusion for all public sector banks this year.
The downgrade will not materially impact SBI’s earnings, as 85% of its funding is from domestic sources, Morgan Stanley Research said in a note on SBI on Wednesday.
“Risk-return stacked in its favour. While SBI is guiding for slippages to remain at elevated levels in the second quarter of 2011-12, we believe that, at current valuations, the stock is pricing in most of the negatives,” Morgan Stanley said, maintaining a buy on the stock.
Moody’s downgrade of SBI reinforces a negative outlook on India’s largest bank and on the banking sector as a whole, Nirmal Bang Securities said in a report.
“We’re downgrading our FY12 earnings estimate by 2.7% to Rs101,202 million and FY13 earnings estimate by 6.1% to Rs120,253 million, reducing the target price by 18.5% to Rs1,520 and maintaining the sell recommendation.”