S&P affirms 'BBB-/A-3' ratings for State Bank of India with stable outlook & improved asset quality.

Sep 12, 2022, 09:44 am

S&P Global Ratings today affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings on SBI. At the same time, we affirmed our 'BBB-' long-term issue rating on the bank's senior unsecured notes. The outlook on the long-term rating is stable.

SBI's asset quality should continue to improve.

India's robust economic growth and recovery from the pandemic should support borrowers' creditworthiness. In S&P's base case, the bank's weak loans, defined as nonperforming loans and restructured loans, will decline to 3.0%-3.5% of total loans over the next 12-18 months, from about 4.8% as of June 30, 2022.

SBI holds adequate provisioning of 70% for the weak loans. Credit costs should remain at about 1% over our forecast period.

SBI's asset quality is likely to stay better than the Indian sector average and in line with international peers over the next two years. The bank's asset quality is comparable to similarly rated international peers. This follows gradual improvements in recent years with a resolution and recovery of problem loans. Pandemic-related weak loans are unlikely to disrupt these improvements. This is given that the restructured loans are small at about 1% of total loans.

SBI can absorb the impact of higher inflation and interest rates.

The small and midsize enterprise (SME) sector and low-income households are vulnerable to rising interest rates and high inflation. However, in S&P's base case of moderate interest-rate hikes, these risks are limited for SBI. The bank has a diversified loan book with a large share of customers from the government-owned or government-employed sectors. This should limit credit stress on its portfolio. Moreover, policy rates in India are rising from a low base, and most borrowers are accustomed to high interest rates.

SBI's capitalization could weaken in the absence of additional common equity capital.

S&P estimates the bank's RAC ratio could dip below 5% by fiscal year ending March 2025, from 5.2% as of March 31, 2022. This is due to a strong pick-up in credit growth to 13%-14% amid a robust economic recovery. S&P further expects earnings to improve on the back of higher growth and margins, although marked-to-market losses on its investment book could offset some of the benefits.

S&P forecast a return on assets of 0.8%-0.9% for the next two years, higher than the 0.7% reported in fiscal 2022. Earnings improvements will likely not be sufficient to sustain a RAC ratio of above 5% in the absence of additional common equity capital to fund strong credit growth. Although SBI's earnings could get some uplift from stake sales in subsidiaries, the timing and quantity of profits from such sales are uncertain.

While SBI plans to raise additional Tier-1 debt, S&P is unlikely to count these funds as equity. This is because we believe the government of India will intervene to prevent these instruments from absorbing losses. S&P applies this treatment to all public-sector banks in India, but not to private-sector banks. This is given the government's differential intervention in the past. As of June 30, 2022, additional Tier-1 debt formed 1.4% of the bank's reported risk weighted assets on a consolidated basis.

The stable outlook on SBI over the next 18 months reflects our expectation that the bank will sustain its market leadership in India's banking sector. Its funding and liquidity will likely stay strong, supported by high customer confidence. S&P expects asset quality to remain better than the Indian sector average and comparable to that of similarly rated international peers.

A downgrade is unlikely, based on our view of a very high likelihood of support from the government of India. S&P's assessment of SBI's stand-alone credit profile (SACP) needs to weaken by two notches for a downgrade, which we view as unlikely over the next 24 months.

S&P could raise the ratings on SBI if we raise our sovereign ratings on India over the next two years. This is given a very high likelihood of support from the government of India. Our assessment of SBI's SACP could improve if the bank improves its capitalization and earnings. For example, if the bank increases its RAC ratio to 5.5%-6% on a sustained basis along with a return on assets of 1% while maintaining better-than-peers asset quality.