By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed State Bank of India’s (SBI) Long-Term Issuer Rating at ‘IND AAA’ with a Stable Outlook. The instrument-wise rating action is as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III Tier II Bonds*

-

-

-

INR50

IND AAA/Stable

Assigned

*Yet to be issued

KEY RATING DRIVERS

Largest and Systemically Most Important Bank: SBI holds high systemic importance, resulting in a high probability of ordinary and extraordinary support from the government of India (GoI), if required. SBI is the largest bank in India in terms of advances and deposits, with FY18 market share (universe of domestic banks) of about 23% and 24%, respectively. It has a pan-India presence, with the largest network of 22,428 branches on 30 June 2018 and is the sole banker (of organised credit) in many unbanked and economically backward regions in India. The bank has a strong standalone profile - around 45% low-cost current and savings account (CASA) deposits), large granular retail portfolio, stronger-than-peers’ fee income profile and large non-bank franchises as investments. The GoI owns a majority stake in SBI (58.5% on 30 September 2018). During FY14-FY18, the bank received INR248.4 billion from the GoI in equity.  

 

Towards the End of Corporate Stress Recognition Cycle: The bank’s slippages increased to INR471.7 billion during 4QFY18-1QFY19, primarily on account of the Reserve Bank of India’s revised stressed asset framework. Two-thirds of the total slippages in 1QFY19 were from non-corporate segments, which could increase in view of the rising stress levels across this segment, more specifically micro and small enterprises. The bank reported a watch list (including special mention 1 and 2 category of accounts) of weak corporates with total fund-based exposure aggregating INR246.3 billion as of 1QFY19, with the power sector accounting for around 41% of the stress (INR100.8 billion).

 

Additionally, the bank would also have non-fund based exposure outstanding towards accounts marked as non-performing assets in the large corporates and small and medium size enterprises segment. Considering this, we do not expect the total current stock of unrecognised assets to exceed around 1.7% of the gross advances at end-1QFY19. Ind-Ra estimates slippages of about 200bp and credit cost of 230-240bp for FY19 (on account of accelerated and aging provisions and incremental slippages), with an expectation of a gradual recovery through the year.

 

Ability to Price in Assets & On-board Risks Amid Rising Interest Rates: In the current scenario of tight liquidity and rising interest rate scenario, SBI is better placed among the lending institutions on account of its low funding cost, comfortable capitalisation, pricing (since it is one of the few public sector banks (PSBs) with the ability to pick up loan assets) and ability to select borrowers in a lender’s market. In addition to corporate exposures, the bank’s pan-India footprint and its digital channel efforts will assist in increasing its share of non-corporate portfolio and liability accretion.

 

Profitability Pressures due to Treasury and Corporate Stress Overhang: SBI reported a loss of INR48.7 billion for 1QFY19; driven largely by higher-than-expected investment provisions, as the bank took the entire mark-to-market hit of higher bond yields in the first quarter and aggressive provisioning on stressed assets. The bank has adequate provisioning on almost all accounts referred to the National Company Law Tribunal with provision coverage ratio of 65% and 79% towards the tribunal list 1 and 2, respectively. Ind-Ra expects the blended haircut in list 1 to be around 60% and 65%-70% in list 2.

 

SBI had coverage on non-performing assets of 53.4% at end-1QFY19 (4QFY18: 50%). The bank could take three of its subsidiaries public in FY19, which may add one-off gains to the overall profitability. Nevertheless, core profitability in FY19 would remain muted with the expectation of a loss in 1HFY19, on account of slippages from the identified stock of stressed assets and accelerated provisions. Also, rising systemic rates would keep up the pressure on treasury income and the bank may have to provide additionally INR30 billion in the rest of FY19. Since most of the stress would have been recognised and provided for by FY19, Ind-Ra does not expect a significant rise in credit costs on account of the transition to Ind-As.

 

Capitalisation Remains Adequate: SBI remains a better capitalised PSB than peers, with a common equity tier 1 (CET1) ratio of 9.8% in 1QFY19 (1QFY18: 10.1%), the third-highest among all PSBs. SBI is self-sufficient in maintaining minimum CET1 buffer over the Basel III transition period; the bank, with its superior access to capital markets, also plans to raise INR200 billion of tier 1 capital in FY19, mainly towards funding credit growth. Ind-Ra derives comfort from SBI’s capital buffers, which are likely to be adequate to cover the credit costs through FY19-FY20 and support its medium-term growth plans. Monetisation of some of its non-core assets presents additional cushion to its capitalisation. Additionally, Ind-Ra believes a meaningful capital requirement for SBI will only show up if it decides to maintain its CET1 ratio above 9% in the medium term.

 

Sturdy Liability Franchise with Comfortable Liquidity: SBI’s CASA has been fairly robust at around 45% over the last few years (1QFY19: 45.1%). This is because its dependence on volatile and high-cost wholesale deposits remains low, helped by its large branch network and a highly entrenched customer base. The bank’s top 20 deposits to the total deposits ratio at 4.4% was the least among Indian banks at end-March 2018, highlighting the granularity and robustness of its liability franchise. Nevertheless, the pace of incremental growth of CASA deposits has declined and is lower than that of the banking system, primarily due to lower current account deposit growth. 

SBI’s liquidity coverage ratio improved to 139.8% at end-1QFY19 (4QFY18: 134.1%). As of March 2018, SBI had a short-term (one year) funding mismatch of 14% (as a percentage of total assets; FY17: 16.5%).


RATING SENSITIVITIES

Negative:  SBI’s long-term ratings are at its support floor and are unlikely to change unless there is a change in the GoI’s support stance, which is extremely unlikely.


COMPANY PROFILE

SBI is India’s largest bank by far in terms of assets, deposits, operating profit and by number of branches. The bank with 22,428 branches (1QFY19) has one of the largest branch networks in the world, spread across the country with around 63% of its branches in rural and semi urban locations, furthering the GoI’s initiative to increase banking footprint in the less banked regions of the country.

 

FINANCIAL SUMMARY 

Particulars

FY18

FY17

Total assets (INR billion)

34,547.52

27,059.66

Total equity (INR billion)

2,191.29

1,882.86

Net income (INR billion)

-65.47

104.84

Return on assets (%)

-0.2

0.4

CET1 (%)

9.7

9.8

Capital adequacy ratio (%)

12.6

13.1

Source: Company annual report


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

24 August 2017

13 July 2016

6 October 2014

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Basel III Tier II Bonds

Long-term

INR50

IND AAA/Stable

-

-

-


SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121