By Jindal Haria

India Ratings and Research (Ind-Ra) has rated State Bank of India’s (SBI) Basel III compliant Tier II bonds 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

 

The rating reflects SBI’s systemically important position, the size of its franchise, strong standalone profile and Ind-Ra’s expectations that the bank would continue to be one of the most important constituents of the Indian banking system.

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 gross advances and deposits, with a market share of about 25% (in the universe of domestic banks) in FY19. It has a pan-India presence, with the largest network of 22,010 branches at end-FY19 and is the sole banker (of organised credit) in many unbanked and economically backward regions in India. The bank has a strong standalone profile - low-cost current and savings account (CASA) deposits of 45.7%, 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 (57.13% at end-FY19). During FY14-FY18, the bank received INR248.4 billion from the GoI in equity; in FY19, however, it did not receive any equity.  

 

Towards the End of Corporate Stress Recognition Cycle: The bank’s slippages decreased to INR397.4 billion in FY19  from INR 1,002.9 billion in FY18 primarily on account of the Reserve Bank of India’s revised stressed asset framework in FY18 and slippages of certain stressed corporates in FY19. Out of the total slippages in FY19, two-thirds occurred in 1HFY19.  In 4QFY19, 72% of the slippages were from non-corporate segments; this share could increase in the near term in view of the rising stress levels across this segment, especially in the case of micro and small enterprises. The bank’s special mention accounts 1 and 2 declined to INR77 billion in 4QFY19 from INR171 billion in 3QFY19. The bank also stated that 26.6% of its standard private power sector (INR686.4 billion) is in the sub-investment grade. Out of its total exposure (INR34.9 billion) to a large infrastructure and financing conglomerate that has witnessed substantial credit deterioration, about 50% is in the green and amber category. Ind-Ra expects exposure on this account to need further provisions.

 

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, Ind-Ra does not expect the total current stock of unrecognised assets to exceed around 1% of the gross advances at end-FY19. The agency estimates slippages of about 1-1.5% and credit cost of about 2% for FY20 (aging, power sector stress recognition and exposure to private stressed financial institutions). In case the resolutions under National Company Law Tribunal (NCLT) speed up materially, the expected credit costs could be partially offset by write-backs (the bank’s reported provisions on the 40 accounts in List 1 and List 2 is 93%).

 

Ability to Price in Assets & On-board Risk Amid Rising Interest Rates: In the prevailing scenario of tight liquidity and volatile interest rates, 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 the 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 enable it to increase its share in the non-corporate portfolio and liability accretion.

 

Profitability Pressures Could Ease in FY20: SBI reported a small profit of INR8.62 billion for FY19 (loss of INR65.5 billion in FY18), mainly because of the provisions declining to about INR545.7 billion in FY19 (INR660.6 billion in FY18) and higher interest income (net advances growth of 13% in FY19). The bank has adequate provisioning on almost all accounts referred to the NCLT, with the total reported provision coverage ratio of 99% and 87% towards the tribunal list 1 and 2, respectively.

 

SBI had coverage (excluding technical write-offs) of 61.9% on non-performing assets at end-FY19 (FY18: 50.4%). The core profitability in FY20 is likely to be materially better than that in FY19, as credit costs are likely to be lower in FY20. Volatile systemic rates would maintain the pressure on treasury income and the bank. Since most of the stress would have been recognised and provided for by FY20, Ind-Ra does not expect a significant rise in credit costs on account of the transition to Ind-As as and when applicable.

 

Capitalisation Remains Adequate: SBI remains a better capitalised PSB than peers, with a common equity tier 1 (CET1) ratio of 9.62% in FY19 (FY18: 9.68%); in the agency’s opinion, SBI is one of the few public sector banks with the ability to raise equity directly from the markets. It also has non-core assets that are large profitable enterprises in their own segments and the bank has established a track record of monetising them to raise equity. Ind-Ra derives comfort from SBI’s capital buffers and operating 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 an 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 (FY19: 45.7%). 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 large size, 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 was 106.05% at end-FY19 (FY18: 119.6%). 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

FY19

FY18

Total assets (INR billion)

36,809.14

34,547.52

Total equity (INR billion)

2,209.13

2,191.29

Net income (INR billion)

8.62

-65.47

Return on assets (%)

0.02

-0.2

CET1 (%)

9.6

9.7

Capital adequacy ratio (%)

12.7

12.6

Source: SBI, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

25 October 2018

24 August 2017

13 July 2016

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Basel III Tier II Bonds*

Long-term

INR100

IND AAA/Stable

IND AAA/Stable

-

-

*Details are in Annexure below


ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate/Interest Rate (%)

Maturity Date

Rated Amount (billion)

Basel III Tier II Bonds

INE062A08165

2 November 2018

8.90%

2 November 2028

INR41.16

 

 

 

 

 

 

Utilised Limits

INR41.16

Unutilised Limits

INR58.84

Total

INR100.00


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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

    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