Moody's downgrades stand-alone rating of SBI ::Angel Broking,

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Moody's downgrades stand-alone rating of SBI
Rating action: Moody's Investors Service has downgraded State Bank of India's (SBI) bank
financial strength rating (BFSR), or stand-alone rating, to D+ from 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 also downgraded to Ba3(hyb) from Ba2(hyb). The revised BFSR
carries a stable outlook and the Hybrid rating a negative outlook. The credit rating
downgrade comes on the back of the low tier-I capital adequacy ratio and expectations
that the rise in NPAs is likely to continue in the near term – due to higher interest rates and
a slower economy.
Our stance: We had turned cautious on the capital adequacy front post the 4QFY2011
results itself wherein we had highlighted the weakened capital adequacy as a key risk to
our investment call. We had also cut our credit growth (by 4% each for FY2012 and
FY2013) as well as earnings estimates (by 11-15% for FY2012 and FY2013). Though the
bank’s management has time and again stated that its plans for a rights issue are on
track, media reports indicate that the rights issue is unlikely to go through in FY2012
considering the tight fiscal situation of the central government.
Issue specific to SBI: Post the announcement of the downgrade, Bank Nifty cracked by
c.4%. However, we note that the downgrade action is an issue specific to SBI and is
unlikely to hamper prospects of other banks. The downgrade is likely to push up borrowing
costs (both tier-II borrowings and overseas borrowings) for the bank. The borrowings of SBI
as of FY2011 through borrowings outside of India stood at `70,231cr constituting c.60%
of total borrowings and 5.7% of total liabilities. The higher cost of funds is likely to add to
the negative overhang on the stock in the near-term.
Valuations cheap, but returns likely to be back ended: The earnings trajectory for SBI
remains reasonable on the back of declining regulatory provisioning burden. However, the
lower capital adequacy and higher level of delinquencies have been plaguing the stock’s
performance over the past 2 quarters and are unlikely to be resolved in the short term due
to the tight fiscal position of the central government and the slowing domestic economy.
That said, we remain positive on the stock as the bank’s core RoEs have improved over the
past few years due to strong CASA market share gains and high fee income and, unlike
most other PSBs, actual FY2011 RoEs are below core levels due to low asset yields,
providing scope for upside as yields normalise to sectoral averages. We believe, going
forward, SBI has ample levers to deliver healthy operating income growth even in a higher
interest rate environment as well as manage its provisioning requirements. The bank’s NIM
has been on an accelerating path (except the dip due to one –offs in 4QFY2011) since
1QFY2010 from 2.3% to 3.6% in 1QFY2012. The bank has also recently caught up with
peers in terms of increasing the lending rates which is likely to support NIMs in the shortterm.
Valuations (at 1.1x FY2013E ABV after adjusting for subsidiaries) appear cheap, in
our view; however the stock’s returns are likely to be back ended. We maintain our Buy
recommendation on the stock with a target price of `2,403.