Moody's downgrades stand-alone rating of State Bank of India

Stocks and Financial Services Press Releases Wednesday October 5, 2011 10:48
Singapore--5 Oct--Asian Banker
Modest capital and weakening asset quality; senior debt rating unaffected

Singapore, October 4th 2011 - Moody's Investors Service has downgraded the 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 downgraded to Ba3(hyb) from Ba2(hyb).
The revised BFSR carries a stable outlook and the Hybrid rating a negative outlook.
Meanwhile, other credit ratings are unaffected and are detailed below.
Ratings rationale

"The rating action considers SBI's capital situation and deteriorating asset quality. Our expectations that non-performing assets (NPA) are likely to continue rising in the near term -- due to higher interest rates and a slower economy -- have caused us to adopt a negative view on SBI's creditworthiness," says Beatrice Woo, a Moody's Vice President and Senior Credit Officer.

SBI reported a Tier 1 capital ratio of 7.60% as of 30 June 2011. The level pushes the bank into a lower rating band. In addition, it was below the 8% Tier 1 ratio 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).

Finally, such a level for its Tier 1 capital ratio provides an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality.

"Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital," says Woo.

"And given that a bank's ability to freely access the capital markets is an important rating criterion globally, we therefore believe a lower BFSR for SBI is warranted, especially as these circumstances are likely to recur," says Woo.

As SBI, similar to other PSB in India, will face cyclical swings in its Tier 1 ratio over a 3-year period, we have rated it through the cycle assuming an average Tier 1 capital ratio of 8.5%.

The INR230 billion rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30%. However, we estimate that capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating another capital exercise.

On the asset quality front, the bank's NPA, as of 30 June 2011, reached a 3-year high of 3.52% of loans and INR277,680 million on a absolute basis. For the system, the ratio was 2.3% as of 31 March 2011.
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.
Therefore, Moody's expects SBI's potential credit costs will be relatively high in the near-term. NPA -- as a percentage of the bank's Tier 1 capital ratio -- is now about 43%.

In determining SBI's stand-alone BFSR, Moody's assessed the bank's capital after incorporating expected losses in its risk assets using scenario analysis. This approach is consistent with Moody's "Calibrating Bank Ratings in the Context of the Global Financial Crisis" (February 2009) and the assumptions in "Stress Testing Indian Banks' Asset Quality" (January 2009).

Under a stress scenario, which assumed a gross NPA ratio of 12.07%, SBI would require INR374.0 billion, or USD8.0 billion, 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.

In order for SBI to raise its stand-alone rating, the bank has to increase and sustain the level of its Tier 1 capital, as well as contain its asset quality, in line with other C- rated Indian banks over an extended period.

Finally, the credit ratings incorporate Moody's unchanged assessment that the probability of systemic support for SBI, if needed, is very high, and results in a one-notch lift in its GLC deposit rating of Baa2 from its standalone rating of Baa3.

This view is predicated on SBI's systemic significance in the domestic banking landscape, and its close relationship with the government of India, via the latter's 59.4% holding, and as evidenced by the bank's receipt of repeated capital infusions.

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009. Please see the Credit Policy page on for a copy of these methodologies.

SBI, headquartered in Mumbai in India, had assets of INR12,237 billion as of March 31, 2011. It is the largest bank by any measure in the country.
The detailed ratings and actions are shown below. The ratings carry stable outlooks except where indicated:

The standalone BFSR was lowered to D+ from C- which maps now to a BCA of Baa3 from Baa2; GLC deposit of Baa2; foreign currency long-term/short-term deposit of Ba1/Not Prime; foreign currency long-term/short-term senior debt of Baa2/Prime-2; foreign currency subordinated, or Lower Tier II debt of Baa3; junior subordinated, or Upper Tier II debt of Ba1; and the Hybrid Tier 1 debt was lowered to Ba3(hyb) from Ba2(hyb) with a negative outlook.

Regulatory disclosures

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are considered EU Qualified by Extension and therefore available for regulatory use in the EU. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.
Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website for further information.

Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. (October 4 2011)--

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