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State Bank of India (SBIN)
Banks/Financial Institutions
Moody’s downgrade has limited direct impact. We see the impact of a downgrade
restricted to an increase in the cost of borrowings in the near term though mediumterm
issues of capital would need to be addressed—a task which SBI is in engaging in
actively with GoI. In the near term, RoEs of 18-19%, conservative slippage assumptions
of 3% and loan loss provisions fuel growth for the bank. Maintain BUY.
BFSR rating downgraded along with hybrid instruments; key concerns – CAR and delinquencies
Moody’s downgraded SBI’s Bank Financial Strength Ratings (BFSR), which represents the rating
agency’s opinion of the bank’s intrinsic safety and soundness, to D+ (from C-) with a stable
outlook. It has downgraded the bank’s hybrid debt rating to Ba3 from Ba2. The former represents
a broader outlook on the bank and the latter represents specific instruments issued. The bank has
two issues of US$400 mn (6.439%, call and step-up option) and US$225 mn (7.14%, call and
step-up option) under these instruments. Key concerns raised are primarily on the weak capital
adequacy ratio and deteriorating asset quality due to higher interest rates and a slowing economy.
Capital – a problem that can be addressed but we don’t see immediate risk to growth
While SBI is in active dialogue with GoI to ensure their participation to the rights issue, we believe
that the bank is not immediately constrained from its low Tier-1 ratio of 7.6%. We believe that the
bank is reasonably capitalized to fund loan growth of about 16% levels without (1) materially
changing the underlying composition of assets, (2) sharply consuming its current Tier-1 capital or
(3) missing any opportunity to grow as the macro environment suggests a slowdown. It is
important to note that SBI is currently delivering RoEs in the range of 18-19% and a payout ratio
of about 20% gives healthy internal accruals to fund about 13-14% of the loan book. Further, a
shift in the composition of assets to lower risk weights can reduce strain on capital consumption.
Estimates factor high slippages and provisioning levels; impact more visible on borrowing costs
We believe that our current estimates (highest since FY2004) factor conservative slippages at
elevated levels of 3% resulting in higher loan loss provisions of 1.4% factor the slippages caused
by higher interest rates and slowing economic growth. A large part of recent slippages have
emerged from the transition exercise undertaken by the bank in recent quarters and expect
improvement from FY2013E. We expect medium-term impact on NIM (domestic NIM at 3.9%
while overseas NIM is at 1.7%) especially on the foreign currency borrowings which fund about
15% of loans with the downgrade. We are building conservative NIM expansion in FY2012E
(20 bps) despite an impressive 50 bps qoq improvement in 1QFY12. There would be limited impact
on capital instruments as the bank is not planning to raise through hybrids as they could be
disallowed in Basel 3 and Tier-2 borrowings have been raised only in domestic markets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBIN)
Banks/Financial Institutions
Moody’s downgrade has limited direct impact. We see the impact of a downgrade
restricted to an increase in the cost of borrowings in the near term though mediumterm
issues of capital would need to be addressed—a task which SBI is in engaging in
actively with GoI. In the near term, RoEs of 18-19%, conservative slippage assumptions
of 3% and loan loss provisions fuel growth for the bank. Maintain BUY.
BFSR rating downgraded along with hybrid instruments; key concerns – CAR and delinquencies
Moody’s downgraded SBI’s Bank Financial Strength Ratings (BFSR), which represents the rating
agency’s opinion of the bank’s intrinsic safety and soundness, to D+ (from C-) with a stable
outlook. It has downgraded the bank’s hybrid debt rating to Ba3 from Ba2. The former represents
a broader outlook on the bank and the latter represents specific instruments issued. The bank has
two issues of US$400 mn (6.439%, call and step-up option) and US$225 mn (7.14%, call and
step-up option) under these instruments. Key concerns raised are primarily on the weak capital
adequacy ratio and deteriorating asset quality due to higher interest rates and a slowing economy.
Capital – a problem that can be addressed but we don’t see immediate risk to growth
While SBI is in active dialogue with GoI to ensure their participation to the rights issue, we believe
that the bank is not immediately constrained from its low Tier-1 ratio of 7.6%. We believe that the
bank is reasonably capitalized to fund loan growth of about 16% levels without (1) materially
changing the underlying composition of assets, (2) sharply consuming its current Tier-1 capital or
(3) missing any opportunity to grow as the macro environment suggests a slowdown. It is
important to note that SBI is currently delivering RoEs in the range of 18-19% and a payout ratio
of about 20% gives healthy internal accruals to fund about 13-14% of the loan book. Further, a
shift in the composition of assets to lower risk weights can reduce strain on capital consumption.
Estimates factor high slippages and provisioning levels; impact more visible on borrowing costs
We believe that our current estimates (highest since FY2004) factor conservative slippages at
elevated levels of 3% resulting in higher loan loss provisions of 1.4% factor the slippages caused
by higher interest rates and slowing economic growth. A large part of recent slippages have
emerged from the transition exercise undertaken by the bank in recent quarters and expect
improvement from FY2013E. We expect medium-term impact on NIM (domestic NIM at 3.9%
while overseas NIM is at 1.7%) especially on the foreign currency borrowings which fund about
15% of loans with the downgrade. We are building conservative NIM expansion in FY2012E
(20 bps) despite an impressive 50 bps qoq improvement in 1QFY12. There would be limited impact
on capital instruments as the bank is not planning to raise through hybrids as they could be
disallowed in Basel 3 and Tier-2 borrowings have been raised only in domestic markets.
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