Moody's downgrades SBI over deteriorating asset quality

Global ratings firm Moody's on Tuesday downgraded its rating of State Bank of India's (SBI) financial strength by one notch to ‘D+' on account of the lender's low Tier-I capital ratio and deteriorating asset quality.

“Moody's Investors Service has downgraded the State Bank of India's bank financial strength rating (BFSR), or standalone rating, to ‘D+' from ‘C—',” the agency said in a statement.

As per Moody's, a ‘D' rating suggest “modest intrinsic financial strength, potentially requiring some outside support at times,” while a ‘C' rating denotes “adequate intrinsic financial strength.''

Moody's cited a likely rise in the bank's non-performing assets in the near future as one of the reasons for the downgrade. “The rating action considers SBI's capital situation and deteriorating asset quality. Our expectations that NPAs are likely to continue rising in the near term — due to higher interest rates and a slower economy — have caused us to adopt a negative view on SBI's creditworthiness,” Moody's Vice-President and Senior Credit Officer Beatrice Woo said. The standalone rating for SBI's private sector competitors such as ICICI Bank, HDFC Bank and Axis Bank, stands at ‘C—'

“The revised rating maps to a baseline credit assessment (BCA) of Baa3. As a result of the lower BCA, the hybrid debt rating was downgraded to Ba3(hyb) from Ba2(hyb).

“The revised BFSR carries a stable outlook and the hybrid rating a negative outlook,” Moody's said, adding that other credit ratings of the bank are unaffected.

The ratings downgrade puts pressure on the government to infuse capital in the country's largest lender as soon as possible.

“Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital,” the Vice-President said.

Soaring NPAs

SBI's NPAs reached a three-year high of 3.52 per cent of loans for the quarter ended June 30.

“Against the backdrop of a slowing economy and higher interest rates, the rising trend evident in SBI's new NPA formation rate since the third quarter of 2010-11 will continue. Therefore, Moody's expects SBI's potential credit costs will be relatively high in the near-term. NPA — as a percentage of the bank's Tier-I capital ratio — is now about 43 per cent,” the agency said. Moody's said that under a stress scenario, which assumed a gross NPA ratio of 12.07 per cent, SBI would require $8 billion to replenish its Tier-I capital ratio to 8 per cent.