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Moody today downgraded SBI's bank financial strength rating (BFSR) to D+ from C-, which maps
to a rating of Baa3. SBI's limited ability to manage capital and a further likely deterioration of its
asset quality are the key reasons cited for the negative view. We have a Buy rating on SBI.
Moody's ratings rationale
SBI reported a Tier 1 capital ratio of 7.6% as of 30 June 2011. According to Moody's this low
level pushes the bank into a lower rating band. In addition, it was below the 8% Tier 1 that the
government of India has committed to maintaining in public sector banks (PSB) and
substantially lower than those of other C- rated Indian banks. The latter include banks such as
Axis Bank (Ba1; C-/Baa2; stable), HDFC Bank (Ba1; C-/Baa2; stable), and ICICI Bank (Ba1;
C-/Baa2; stable).
According to the rating agency, SBI's efforts to raise tier I capital for the better part of the year
demonstrates the bank's limited ability to manage capital.
Further, it stated that a bank's ability to freely access the capital markets is an important rating
criterion globally. SBI, thus warrants a lower BFSR rating, especially as such circumstances
are likely to recur.
The Rs230bn rights issue that SBI is currently seeking would raise its Tier 1 to approximately
9.3%. However, Moody estimates that capital deployed for loan growth, assuming 15% p.a for
the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating
another capital raising exercise.
Against a backdrop of a slowing economy and higher interest rates, the rising trend evident in
SBI's new NPA formation rate since 3QFY11 will continue. Under a stress scenario, which
assumed a gross NPA ratio of 12.07%, SBI would require Rs 374bn ($8bn) to replenish its
Tier 1 capital ratio to 8%. To put this into perspective, SBI's ability to absorb losses in a stress
situation is below that of the C- rated Indian banks.
SBI management comments (according to media reports)
D+ rating maps to Baa3 which is investment grade
Bank of Baroda (BOB IN, Buy), Punjab National Bank (PNB IN, Buy), Bank of India (BOI IN,
Hold) all have D+ rating. SBI was the only exception so far.
The present rating of SBI is the same as for government of India (note, as per Moody, India's
local currency government bond rating is Ba1 and foreign currency government bond rating is
Baa3)
Key data points to consider
SBI's gross NPL ratio has come down from 14% in FY01 to 6.2% in FY05 and further down to
3.3% as of March 2011 (3.5% as of June 2011)
The net NPL ratio similarly has come down from 6.3% in FY01 to 2.7% in FY05 and further
down to 1.6% as of March 2011 (1.6% as of June 2011)+
The government last infused equity capital in SBI in 4QFY08. The tier I ratio was 8.01% as of
March 2007 which increased to 9.14% as of March 2008 post the capital infusion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Moody today downgraded SBI's bank financial strength rating (BFSR) to D+ from C-, which maps
to a rating of Baa3. SBI's limited ability to manage capital and a further likely deterioration of its
asset quality are the key reasons cited for the negative view. We have a Buy rating on SBI.
Moody's ratings rationale
SBI reported a Tier 1 capital ratio of 7.6% as of 30 June 2011. According to Moody's this low
level pushes the bank into a lower rating band. In addition, it was below the 8% Tier 1 that the
government of India has committed to maintaining in public sector banks (PSB) and
substantially lower than those of other C- rated Indian banks. The latter include banks such as
Axis Bank (Ba1; C-/Baa2; stable), HDFC Bank (Ba1; C-/Baa2; stable), and ICICI Bank (Ba1;
C-/Baa2; stable).
According to the rating agency, SBI's efforts to raise tier I capital for the better part of the year
demonstrates the bank's limited ability to manage capital.
Further, it stated that a bank's ability to freely access the capital markets is an important rating
criterion globally. SBI, thus warrants a lower BFSR rating, especially as such circumstances
are likely to recur.
The Rs230bn rights issue that SBI is currently seeking would raise its Tier 1 to approximately
9.3%. However, Moody estimates that capital deployed for loan growth, assuming 15% p.a for
the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating
another capital raising exercise.
Against a backdrop of a slowing economy and higher interest rates, the rising trend evident in
SBI's new NPA formation rate since 3QFY11 will continue. Under a stress scenario, which
assumed a gross NPA ratio of 12.07%, SBI would require Rs 374bn ($8bn) to replenish its
Tier 1 capital ratio to 8%. To put this into perspective, SBI's ability to absorb losses in a stress
situation is below that of the C- rated Indian banks.
SBI management comments (according to media reports)
D+ rating maps to Baa3 which is investment grade
Bank of Baroda (BOB IN, Buy), Punjab National Bank (PNB IN, Buy), Bank of India (BOI IN,
Hold) all have D+ rating. SBI was the only exception so far.
The present rating of SBI is the same as for government of India (note, as per Moody, India's
local currency government bond rating is Ba1 and foreign currency government bond rating is
Baa3)
Key data points to consider
SBI's gross NPL ratio has come down from 14% in FY01 to 6.2% in FY05 and further down to
3.3% as of March 2011 (3.5% as of June 2011)
The net NPL ratio similarly has come down from 6.3% in FY01 to 2.7% in FY05 and further
down to 1.6% as of March 2011 (1.6% as of June 2011)+
The government last infused equity capital in SBI in 4QFY08. The tier I ratio was 8.01% as of
March 2007 which increased to 9.14% as of March 2008 post the capital infusion.
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