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Ratings of major Indian financial institutions/commercial Banks

Extract from Standard & Poor's Ratings- 27th October 2003


The affirmation of the 'B' foreign currency short-term rating on State Bank of India (SBI) reflects the bank's sound business profile, underpinned by its continued leading position in the domestic banking industry. The affirmation also reflects the trend of improvement in the bank's asset quality; its gross nonperforming (NPA) ratio improved to 9.4% in fiscal year 2002-2003, from 11.98% in the previous fiscal year. Despite a difficult operating environment during fiscal 2002-2003, SBI lowered its gross and net NPA ratios, as a result of increased recoveries, loan growth, write-offs and upgrades of its classified accounts. Nevertheless, with the 90-day nonperforming asset classification standard taking effect from March 2004, SBI's gross NPAs are expected to edge up. This, however, will be partly mitigated by the bank's accelerated loan-loss provisioning practice, which had been undertaken to bolster its loan-loss reserves toward the upcoming 90-day default norm.

With a falling interest rate environment and the intense competition in the consumer segment, SBI's net interest income (NII) margins, as denoted by its net interest income to average assets, had fallen to 2.9% in the latest fiscal year, although that is still relatively healthy. The bank's NII margins are expected remain healthy, supported by its strategy of diversifying its loan portfolio into the higher-yielding consumer loans, compared with the traditional focus on the lower-yielding large Indian corporate book.

With some pressure on interest margins, this reinforces the necessity of banks to enhance their sources of noninterest income. Unlike most of SBI's peers, whose noninterest incomes are largely supported by trading profits, SBI has a more balanced base of noninterest income, which represents a strong component of fees and commission income. Going forward, SBI is focused on enhancing this revenue source, through new business growth in credit cards, insurance and fund management.

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