Moody's downgrades stand-alone rating of State Bank of India due to modest capital and weakening asset quality

As SBI, similar to other PSB in India, will face cyclical swings in its Tier 1 ratio over a 3-year period, we have rated it through the cycle assuming an average Tier 1 capital ratio of 8.5%.

The INR230 billion rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30%. However, we estimate that capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating another capital exercise.

On the asset quality front, the bank's NPA, as of 30 June 2011, reached a 3-year high of 3.52% of loans and INR277,680 million on a absolute basis. For the system, the ratio was 2.3% as of 31 March 2011.

Against a backdrop of a slowing economy and higher interest rates, the rising trend evident in SBI's new NPA formation rate since 3QFY11 will continue.



Therefore, Moody's expects SBI's potential credit costs will be relatively high in the near-term. NPA -- as a percentage of the bank's Tier 1 capital ratio -- is now about 43%.

In determining SBI's stand-alone BFSR, Moody's assessed the bank's capital after incorporating expected losses in its risk assets using scenario analysis. This approach is consistent with Moody's "Calibrating Bank Ratings in the Context of the Global Financial Crisis" (February 2009) and the assumptions in "Stress Testing Indian Banks' Asset Quality" (January 2009).

Under a stress scenario, which assumed a gross NPA ratio of 12.07%, SBI would require INR374.0 billion, or USD8.0 billion, to replenish its Tier 1 capital ratio to 8%. To put this into perspective, SBI's ability to absorb losses in a stress situation is below that of the C- rated Indian banks.

In order for SBI to raise its stand-alone rating, the bank has to increase and sustain the level of its Tier 1 capital, as well as contain its asset quality, in line with other C- rated Indian banks over an extended period.

Finally, the credit ratings incorporate Moody's unchanged assessment that the probability of systemic support for SBI, if needed, is very high, and results in a one-notch lift in its GLC deposit rating of Baa2 from its standalone rating of Baa3.



This view is predicated on SBI's systemic significance in the domestic banking landscape, and its close relationship with the government of India, via the latter's 59.4% holding, and as evidenced by the bank's receipt of repeated capital infusions.

NOTE: SBI, headquartered in Mumbai in India, had assets of INR12,237 billion as of March 31, 2011. It is the largest bank by any measure in the country.

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(Source- Moody's Investors Service)

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