Mumbai: Global rating agency Moody’s Investors Service on Tuesday downgraded State Bank of India (SBI) citing “modest capital and weakening asset quality”, and it sees bad loans rising at the country’s largest lender on the back of higher interest rates and a slowing economy. The stock slumped on concerns that borrowing costs may rise.
The lowering of the bank financial strength, or standalone, rating to D+ from C- saw the stock plummet to a two-year, intraday low on BSE. The stock ended Tuesday at Rs1,786.70, down 4.08%, after having dropped as low as Rs1,751.35. The benchmark Sensex lost 1.77% to close at 15,864.86 points and the banking index, the Bankex, lost 3.09% to end at 10,219.03.
“The rating action considers SBI’s capital situation and deteriorating asset quality,” said Beatrice Woo, Moody’s vice-president and senior credit officer, in a release. “Our expectations that non-performing assets (NPAs) 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.”
State-owned SBI wasn’t too concerned about the downgrade.
“D+ maps to (a baseline credit assessment of) Baa3, which is still investment grade. BoB (Bank of Baroda), PNB (Punjab National Bank), BoI (Bank of India) are also at D+,” said SBI chairman Pratip Chaudhuri. “We were the only exception so far. The present rating of SBI is the same as GoI (government of India).”
The bank’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.
“The rating downgrade per se will not have any large impact except funds becoming costlier in the overseas market and, yes, SBI does have a considerable overseas presence...but the implication is more sentimental than anything else,” said Vaibhav Agrawal, vice-president, research, at Angel Broking.
Still, the downgrade assumes significance in the light of SBI’s announcement on 22 September that it will increase its foreign bond offering from $5 billion to $10 billion. In July 2010, SBI had raised $1 billion from the overseas market at a 4.50% coupon.
Standard and Poor’s has a BBB- rating on SBI while Fitch has a bbb- rating with “stable” outlook. While the S&P spokesperson did not want to comment, a Fitch official said it was not contemplating any change in the “viability” rating on SBI as it has a “stable” outlook.
Analysts said SBI’s NPA situation may improve after two-three quarters as rates start dropping in the banking system.
SBI’s tier-I capital, or core capital comprising equity and reserves, was at 7.60% as of 30 June. Moody’s noted that this is below the 8% tier-I capital ratio that the government has committed to maintaining in its banks and “substantially lower” than other C- rated banks.
“The level pushes the bank into a lower rating band,” Moody’s said.
Other Indian banks rated C- by Moody’s include private sector banks such as Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd. The tier-I capital of these banks as on 30 June were at 9.36%, 11.4% and 13.36%, respectively.
To get back its rating, SBI has to maintain, for an extended period, the same capital adequacy and asset quality as other banks with a C- rating, Moody’s said.
SBI’s tier-I capital was eroded by almost 2% in the fourth quarter when it set aside Rs7,500 crore from its reserves toward pension liabilities.
That makes capital raising a priority for the bank. It has asked the government to allow it to float a rights issue of at least Rs20,000 crore.
As the government owns 59.4% of the bank, it will need to spend about Rs12,000 crore to maintain its stake at that level. That may prove difficult as the government is already under pressure over sticking to its fiscal deficit target of 4.6% of gross domestic product.
The Union government surprised the bond market on Thursday when it announced an additional borrowing of Rs52,800 crore from the market because of a shortfall in funds.
The tier-I capital ratio “provides an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality”, Moody’s said, adding that it expects the government to soon restore the capital adequacy ratio.
However, “SBI’s efforts to secure this capital for the better part of the year demonstrates the bank’s limited ability to manage its capital”, Moody’s said. Given the limitation of the bank to freely access the capital markets, the rating agency expected these circumstances to be “likely to recur”.
Analysts said the rating change shouldn’t be given undue importance.
“The Indian banking system is inherently much more safer than those in developed countries. Also, we expect SBI to get the capital by the first quarter of the next financial year. We are not unduly concerned,” said Agrawal.
Another analyst with a domestic brokerage said there was nothing new in the rating agency’s assessment and that SBI was actually poised to recover. Analysts said, at current levels, SBI’s valuations look attractive and the stock should bounce back soon.
Ravindra Sonavane contributed to this story.