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Fitch Upgrades State Bank of India’s Individual Rating To ‘C’
-15 December, 2005
Fitch Ratings has upgraded India-based State Bank of India’s (“SBI”) Individual rating to ‘C’ from ‘C/D’. At the same time, Fitch has affirmed the remainder of SBI’s ratings at Long-term foreign currency ‘BB+’, Short-term foreign currency ‘B’, National Long-term ‘AAA(ind)’, and Support ‘3’. The Outlook on the ratings is Stable.
Fitch says that the upgrade in the bank’s Individual rating recognises the considerable progress that SBI has achieved in strengthening its balance sheet, and in particular, reflects a significant improvement in its asset quality and solvency indicators (such as net non-performing loan (“NPL”) to equity ratio) compared with two to three years ago. This is despite the change in NPL recognition in India to 90 days overdue (since FY04) from 180 days. Fitch also notes that the bank’s operational efficiency has also slightly improved over the years and it now has a relatively stronger technological platform and more robust risk management systems. SBI’s recent push into consumer banking (which make up c.25% of total loans; over 50% of its consumer loans are residential mortgages) has also diversified its loan book from predominantly corporate exposure previously. Although not yet a major concern, the agency says that SBI needs to manage its rapid growth in consumer banking as the bank has a relatively limited track record in this business. On the positive side, the focus on the consumer segment also opens up new opportunities for cross-selling, which should help the bank further improve its fee income.
SBI transferred a part of its fixed income government securities portfolio to the ‘held-to-maturity’ category during FY05 (ended March 2005) and in 1H06 (ended September 2005) in order to minimise ‘mark-to-market’ losses due to further hikes in interest rates. Nevertheless, the bank had to make onetime ‘mark-to-market’ provisions through its income statement while effecting this transfer. Although SBI has simultaneously reduced the duration of its ‘available-for-sale’ investment portfolio, it is prone to a slight equity diminution on account of such market risk if interest rates were to rise further. Although SBI’s total capital adequacy ratio of 11.3% (Tier-1 ratio: 7.95%) at September 2005 had slipped below its own internal target of 12%, the bank raised INR33 billion worth of Tier-2 capital in December 2005 to meet the capital charges for future loan growth and progressively tightening regulations on market risk. Although addition of Tier-1 capital would be credit positive for the bank, Fitch notes that SBI’s reported equity to assets ratio of 5.23% at March 2005 was a slight improvement on previous years’ figures.
Fitch further says that SBI’s debt ratings are closely linked with India’s sovereign rating (rated Longterm ‘BB+’) given its majority government ownership, systemic importance and its status as India’s largest commercial bank. Given that SBI commands a market share of close to 20% in assets of the Indian banking system, Fitch believes that state support for SBI is virtually assured, should it be necessary. SBI is also the principal banker to the government and has borrowed on international markets on behalf of the government; government links are further underscored by a large representation of government nominees on the bank’s board of directors. In effect, SBI is a quasisovereign risk and its ratings would change in tandem with the India sovereign’s ratings.
SBI was established under an Act of Parliament in 1955, which prohibits the government’s holdings (through the central bank) from falling below 55%; the bank plans to gradually grow its international business over the next two to three years.
Rating of ICICI Bank...Read detailed comments by Fitch