Moody's downgrades SBI over poor Tier-I capital ratio, NPAs

The rating agency cited a likely rise in the bank's non-performing assets in the near future as one of the reasons for the downgrade

New Delhi: Global ratings firm Moody's today downgraded its rating of State Bank of India's (SBI) financial strength by one notch to 'D+' on account of the lender's low Tier-I capital ratio and deteriorating asset quality.

"Moody's Investors Service has downgraded the State Bank of India's bank financial strength rating (BFSR), or standalone rating, to 'D+' from 'C-'," the agency said in a statement.

As per Moody's, a 'D' rating suggest "modest intrinsic financial strength, potentially requiring some outside support at times", while a 'C' rating denotes "adequate intrinsic financial strength".

Moody's cited a likely rise in the bank's non-performing assets in the near future as one of the reasons for the downgrade.

"The rating action considers SBI's capital situation and deteriorating asset quality. Our expectations that NPAs (non-performing assets) 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," Moody's vice-president and senior credit officer Beatrice Woo said.

The standalone rating for SBI's private sector competitors, like ICICI Bank, HDFC Bank and Axis Bank, stands at '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," Moody's said, adding that other credit ratings of the bank are unaffected.

The ratings downgrade puts pressure on the government to infuse capital in the country's largest lender as soon as possible.

"Notwithstanding our expectations that SBI's capital ratios will soon be restored through 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," Ms Woo said.

SBI had reported a Tier-I capital ratio of 7.60% as of 30 June 2011, as against the suggested level of 8% termed as desirable by the government for public sector banks.

"The level pushes the bank into a lower rating band. In addition, it was below the 8% Tier-I ratio that the government of India has committed to maintaining in public sector banks and substantially lower than those of other C- rated Indian banks," the ratings agency said.

It said such a low Tier-I capital ratio provides an insufficient cushion to support growth and to absorb potentially higher credit costs arising from deteriorating asset quality.

Moody's said SBI, like other public sector banks in India, will face cyclical swings in its Tier-I ratio over a three-year period and accordingly, it has rated the bank through the cycle assuming an average Tier-I capital ratio of 8.5%.

"The Rs23,000 crore rights issue that SBI is currently seeking would raise its Tier-I ratio to approximately 9.3%. However, we estimate that capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier-I ratio to fall below 8%, thereby necessitating another capital exercise," Moody's said.

SBI's NPAs reached a three-year high of 3.52% of loans for the quarter ended 30th June.

"Against the backdrop of a slowing economy and higher interest rates, the rising trend evident in SBI's new NPA formation rate since the third quarter of 2010-11 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-I capital ratio-is now about 43%," the agency said.

Moody's said that under a stress scenario, which assumed a gross NPA ratio of 12.07%, SBI would require $8 billion to replenish its Tier-I 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 standalone rating, the bank has to increase and sustain the level of its Tier-I capital, as well as contain its asset quality, in line with other C-rated Indian banks over an extended period," Moody's said.



Vikas B

5 years ago

Why is recapitalization and What does Recapitalization of SBI mean for me (citizen, taxpayer)?


Birla Sun Life AMC introduces new facilities for customers

Birla Sun Life launches subscription through debit card, daily systematic transfer plans and step-up SIPs

Birla Sun Life Asset Management Company Ltd (BSLAMC) has launched an array of customer centric facilities to enhance the customer experience and convenience. These are subscription through debit card, every day systematic transfer plan (STP) and systematic investment plan (SIP) with step-up option.

BSLAMC has launched the debit card payment on its website through a secure platform such that existing investors would be able to use their debit card (VISA) while making additional subscriptions through their secured login section on the AMC website. This service has been introduced to enhance customer convenience as not many investors have access to internet banking for their bank accounts. Currently, subscriptions can be made through banks which are available on the VISA platform, offering features in line with the RBI guideline on 3D security.

Prior to this, BSLAMC had also launched mobile investment manager through which existing customers could manage their investments from the convenience of their mobile phone by registering for the service. Initiatives like the debit card payment and the mobile investment manager facilitate paperless transaction capabilities and go a long way in supporting the environmental cause.


Still under pressure: Tuesday Closing Report

If the Nifty breaks today’s low, it may hit 4,625

Moody’s downgrade of State Bank of India, India’s biggest lender, sent the stock tumbling 5% in intraday trade and resulted in the market closing in the negative for the third straight day. We had mentioned yesterday that the Nifty may fall to the level of 4,700. Today, the benchmark Nifty closed at 4,772, its lowest since 29 August 2011. The intraday high of 4,870 is the lowest after 15 February 2010. The Nifty made a lower low, lower high and lower close for the second day in a row, which indicates a strong downtrend. From here if the index breaks today’s low, we may see the Nifty touch the level of 4,625. 

The market extended its losses for the third day on weak cues from the global arena. Fears that a banking crisis in Europe would impact the global economy weighed down on investors, pulling down markets across the globe. The Nifty opened 26 points lower at 4,824 and the Sensex resumed trade at 16,082, down 69 points. Realty, banking and metal sectors witnessed selling pressure in early trade.

The market traded sideways, hovering on both sides of the neutral line till noon trade but received a severe jolt after news came in that global rating agency Moody’s Investor Services downgraded State Bank of India (SBI) to ‘D+’ from ‘C-’. The downgrade resulted in the stock falling to its lowest since 7 September 2009 on the bourses. The stock closed at 1,794.05, the lowest since 7 September 2009 on the NSE.

The SBI downgrade, as well as a cut in the European indices in opening trade resulted in the domestic market falling to its intraday low at around 1.30pm. At the lows, the Nifty went back to 4,732 and the Sensex tumbled to 15,745. The decline in the market lured investors to pick up stocks at cheaper prices, resulting in a marginal recovery. But still, the market settled lower for the third day in a row with the Nifty down 77 points at 4,772 and the Sensex closing trade at 15,865, a cut of 287 points. Today the NSE saw volumes of 57.93 crore shares.

The advance-decline ratio on the NSE was 521:1218.

Among the broader indices, the BSE Mid-cap index declined 1.28% and the BSE Small-cap index fell 1.09%.

Barring the BSE Capital Goods index, which closed up 0.57%, all other sectoral gauges settled in the red. The main losers were BSE Bankex (down 3.09%), BSE Auto (down 1.94%), BSE PSU (down 1.77%), BSE Oil & Gas (down 1.74%) and BSE Metal (down 1.48%).

The top Sensex gainers were Maruti Suzuki (up 2.73%), Larsen & Toubro (up 1.42%), Wipro (up 1%), Tata Steel (up 0.65%) and BHEL (up 0.45%). The major losers were Coal India (down 4.98%), ICICI Bank (down 4.59%), Tata Motors (down 4.35%), SBI (down 4.08%) and Mahindra & Mahindra (down 3.89%).

The top Nifty performers were Maruti Suzuki (up 2.57%), L&T (up 2.11%), Wipro (up 1.97%), BHEL and Siemens (up 0.78% each). The top five stocks that dragged the index lower were Tata Motors (down 4.85%), ICICI Bank (down 4.43%), M&M (down 4.31%), SBI (down 3.63%) and Jindal Steel (down 3.48%).

Markets in Asia ended in the red as European policymakers on Monday delayed the approval of a fresh bailout to Greece, raising new worries about its default. This apart, South Korea’s manufacturing activity growing at the slowest pace in 11 months in September added to the woes.

The Hang Seng declined 3.40%; the Jakarta Composite fell 2.37%; the KLSE Composite lost 0.45%; the Nikkei 225 slipped 1.05%; the Straits Times tanked 3.45% and the Seoul Composite shrank 3.59%. Bucking the trend, the Taiwan Weighted added 0.48%. The Chinese market is closed for a week-long holiday.

Back home, foreign institutional investors were net sellers of shares worth Rs825.89 crore on Monday. On the other hand, domestic institutional investors were net buyers of stocks worth Rs295.35 crore.

DLF Foundation, the corporate social responsibility arm of the country’s largest realty firm DLF, said it will invest Rs200 crore to establish 250 centres for skill training of one million unemployed youth. These centres would come up under flagship programme DLF LIFE (Learning Initiatives For Employment). The first centre was inaugurated at Okhla, in the national capital, on Monday. The stock shed 0.05% to close at Rs200.65 on the NSE.

National Aluminium Company (Nalco) signed an agreement in Jakarta today for setting up a half-a-million tonnes per annum aluminium smelter and a 1,250MW coal-based power plant in Indonesia’s East Kalimantan province at an investment of $4.5 billion. The investment will be deployed through a Nalco-led joint venture, in which it will have a majority 75% equity. The remaining equity in the JV will be held by a local coal mining firm. Nalco gained 0.16% to close at Rs61 on the NSE.

Film exhibitor and distributor PVR today said it will invest Rs100 crore in the next fiscal to expand its movie screening network across India. The company, which had earmarked Rs100 crore for this fiscal, said it has invested up to Rs40 crore till now. The stock declined 3.70% to end at Rs117 on the NSE.


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