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Fitch affirms ratings of State Bank of India

Fitch Ratings on 19th May 2008 has affirmed the ratings of State Bank of India (SBI) as follows:

- Long-term foreign currency Issuer Default rating (IDR): at 'BBB-' (BBB minus);
- Short-term foreign currency IDR: at 'F3';
- National Long-term rating: at 'AAA(ind)';
- Individual: at 'C';
- Support: at '2';
- Support Rating Floor: at 'BBB-' (BBB minus);
- EUR100 million senior bonds: at 'BBB-' (BBB minus);
- USD500m senior bonds: at 'BBB-' (BBB minus);
- USD300m senior bonds: at 'BBB-' (BBB minus); and
- USD400m perpetual non-cumulative Tier 1 bonds: at 'BB'.

The Outlook is Stable. The INR25 billion Lower Tier 2 subordinated bonds rated 'AAA(ind)' have been paid off in full.

The ratings reflect SBI's strong financial condition among Indian banks, together with its quasi-sovereign risk status as India's largest bank, with very high systemic importance. The Long-term foreign currency rating is driven by the Individual rating and is at the Support Floor.

The timely infusion of INR167 billion equity in March 2008 helped SBI absorb the impact of tighter norms on pension liabilities as well as the higher capital charge for operational risk under the new Basel II guidelines. The improved Tier 1 ratio (9.14% at end-March 2008) will also help the bank to somewhat better absorb the effects of any deterioration in the credit cycle, evidences of which were increasingly visible in FY08.

SBI's gross NPLs increased slightly during Q408, particularly in agriculture, SME and consumer loans, reflecting the pressures of rising costs on borrowers. While better loan monitoring could help control delinquencies in consumer loans, NPL recovery could be affected if property prices were to correct, while the bank's relatively low loan loss reserves (42% of gross NPLs in FY08) may need to be strengthened.

The investment in technology has enabled the bank to better position its branches and exploit the increasing opportunities in non-interest income, for example through remittance services and distribution of third-party investment products. While profitability was boosted in FY08 by increased fee income and trading in equity and fixed income securities, this may be difficult to sustain in FY09 if trading income falls off, together with any pressure on NIM as well as possible increase in loan loss provision and MTM provision on the government securities portfolio.

With over 10,000 branches and 8,500 ATMs, SBI continues to dominate the banking space in India. (This is press release of Fitch)

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