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Fitch Affirms State Bank of India on Merger Announcement

29 August 2007: Fitch Ratings has affirmed State Bank of India's (SBI) ratings as stated below, following its announcement to merge the subsidiary State Bank of Saurashtra with itself.

- Long-term foreign currency Issuer Default rating (IDR) 'BBB-' (BBB minus)/Outlook Stable
- Short-term foreign currency IDR 'F3'
- National Long-term rating 'AAA'(ind) /Outlook Stable
- Individual 'C'
- Support '2'
- Support Rating Floor 'BBB-' (BBB minus)
- EUR100m bonds rated 'BBB-' (BBB minus)
- USD500m bonds rated 'BBB-' (BBB minus)
- USD300m bonds rated 'BBB-' (BBB minus)
- INR25bn Lower Tier 2 subordinated debt rated 'AAA(ind)'

State Bank of Saurashtra is a relatively small bank with assets equivalent to 3% of that of SBI and its merger would not affect SBI's financials in any significant way. The decision to merge could, however, be extended to the other six subsidiary banks in due course, subject to regulatory and government approvals. Together, the assets and net income of the seven subsidiary banks were equivalent to 42% and 45%, respectively, of that of SBI's standalone numbers at financial year ended 31 March 2007. They share a common logo and technology platform with SBI, and enjoy strong regional franchises from the times when they were bankers to the 'princely states' in India before being nationalized in 1959. The banks are well managed with key capital and asset quality ratios comparable with that of SBI. The merger is therefore part of the expected consolidation in the Indian banking system that would increasingly be driven by the need for capital and reinforce competitiveness in an increasingly competitive market.

SBI's ratings continue to reflect its steady performance, together with its quasi-sovereign risk status as India's largest bank with huge systemic importance. The reported NPL ratios improved significantly during this decade (as did that of the Indian banking system) during a benign credit period. While they could now rise if higher interest rates affect the borrower's repayment capacity, any spectacular upsurge is unlikely given SBI's improving risk management systems and the fairly low levels of unsecured consumer lending. (This is press release of Fitch Ratings)

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