Fitch Affirms State Bank of India's Ratings with stable outlook
17 December 2010: Fitch Ratings has affirmed the ratings of State Bank of India (SBI) as follows:
Long-term (LT) Foreign Currency Issuer Default Rating
National LT Rating
Short-Term FC IDR
Support Rating Floor
USD5bn Medium-Term Notes (MTN) Programme
USD800m Senior Unsecured Bonds
USD400m Hybrid tier 1 Bonds
Fitch Ratings has affirmed State Bank of India's (SBI) Long-term (LT) foreign currency Issuer Default Rating (FC IDR) at 'BBB-' and National LT rating at 'AAA(ind)'. The Outlook is Stable. The agency has also affirmed SBI's Short-term FC IDR at 'F3', Individual rating at 'C', Support rating at '2' and Support Rating Floor at 'BBB-'. Additional rating actions are included at the end of the release.
SBI's LT ratings reflect its incomparably strong pan-India franchise with over 13,000 branches and 17,000 ATMs, and are further underpinned by its strong credit fundamentals. The extensive branch presence provides the bank a unique competitive position - largest lender in India with close to one-fifth share each in both system advances and deposits - and lends it systemic importance which supports its strong and stable funding profile. SBI's capitalisation levels continue to be above average, while its major share in central and state governments' banking business helps in a better-diversified earnings profile. SBI's dominance in the Indian banking system and great systemic importance would result in a high probability of regulatory support in the event of crisis, reflected in its Support rating.
The ratings on SBI's senior unsecured debt and tier 1 subordinated bonds are consistent with the approach taken for other similar securities based on Fitch's criteria.
SBI's asset quality remains an area of concern especially in view of the slippages seen in FY10 (NPL: +24% yoy) and further in H1FY11 (+34% yoy). As a result, NPL ratio increased consistently to 3.05% in FY10 and 3.35% at H1FY11 (FY09: 2.86%). Mid-corporate and SMEs accounted for nearly half of the NPLs as slippages in the restructured loans portfolio -- which mainly comprises these two segments -- increased to 14.5% at H1FY11. Gradual phasing out of restructured loans (12-24 months tenure) coupled with expiry of agri debt waiver scheme (in June 2010) was largely responsible for the slippages, which were additionally compounded with delinquencies from the international business as well as from the State Bank of Indore merger (16% of NPL additions). Given the management's strong focus on the above segments for better yields and under expectations of better economic growth, the bank's asset quality would be a key earnings driver through the medium- to long-term. SBI's provisioning coverage has been steadily increasing (H1FY11: 62.8%; FY10: 59.2%), and is expected to meet the regulatory minimum stipulation of 70% by the extended deadline of September 2011 (as approved by the Reserve Bank of India).
Higher branch openings coupled with new salary account mandates of government and corporate entities led to a significant increase in low-cost current-savings account (CASA) deposit ratio (FY10: 47.3%; FY09: 41.6%). The improvement in SBI's funding profile (including consistent shedding of bulk deposits) helped support its net interest margin (NIM) in a benign interest rate environment, although overall profitability has been impacted on account of increased operating expenses -- mainly from gratuity and pension provisioning -- and rising credit costs. However, with SBI having already provided for 60% for gratuity (which is the larger portion) and gradual decline in credit costs (on account of better economic prospects), Fitch expects earnings to normalise in the near-term. That said, the trade-off between NIM and credit costs would continue to be the long-term determinant of SBI's profitability, considering its incremental asset mix.
The bank's above-average capital ratios are supported by timely issuances of equity (proposed rights issue of INR200bn pending government approval; last in 2008) and hybrids.
SBI's LT FC IDR is at its Support Rating Floor, and could see an upgrade in the event of an upgrade of the sovereign's LT FC IDR. The bank's Individual rating could, however, come under pressure if its asset quality persistently deteriorates impacting both earnings and capital position.
- USD5bn medium-term notes (MTN) programme affirmed at 'BBB-';
- USD800m senior unsecured bonds affirmed at 'BBB-'; and
- USD400m hybrid tier 1 bonds affirmed at 'BB-'.
(This is press release of Fitch)
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