New Delhi: As it spends next 6-8 quarters rebuilding balance-sheet buffers, SBI's profitability metrics could face lingering pressure, Moody's Investors Service said Wednesday.
SBI's private sector counterpart, ICICI Bank has however seen significant improvement in its core operating profitability, allowing the bank to absorb higher level of credit costs, it said.
"SBI is also showing a stabilization of its underlying asset quality, and we believe that recent developments provide further confirmation that it has moved past the worst of its latest asset cycle," Moody's said.
Country's largest lender, SBI's new impaired loan formation has slowed, and this development is a sign that, barring new adverse shocks, the bank's delinquencies in this cycle have peaked, it said.
"By contrast, ICICI Bank's asset quality has deteriorated over the last few quarters, and the bank's corporate loans will remain under pressure, because some of its corporate customers show weak debt servicing metrics," it said.
ICICI exhibits a meaningful exposure to large corporates, and that the exposure represents a key source of risk for the bank's asset quality.
In fact, a key weakness of SBI's credit profile is its thin loss-absorbing buffers, making its profit metrics highly sensitive to the credit-loss cycle.
State Bank of India reported a jump in credit costs to 2.2 percent of growth loans in the third quarter ended December 31, 2015 as compared to 1.5 percent in 2014-15.
This situation consumed 81 percent of SBI's pre-provisioning income and reduced its annualized return on assets to 0.21 percent from 0.68 percent over the same periods.
Nevertheless, it said, SBI's strong core earnings capacity ? as measured by operating/preprovisioning profits as a percentage of total assets ? will limit downside risks for profitability, even if credit costs were to increase.
By contrast, ICICI demonstrates significant buffers to withstand a meaningful deterioration in its asset quality, it added.