Moody's retains ratings on SBI, IDBI; sees NPA woes stabilising

Mumbai: Moody's Investors Service has affirmed State Bank of India's (SBI) local and foreign currency deposit ratings at Baa3/P and expects not much deterioration in its asset quality.

The agency has also retained IDBI Bank's local currency and foreign currency bank deposit ratings at Baa3/P-3 apart from affirming its Baa3 senior unsecured debt and senior unsecured medium-term note programme ratings at (P)Baa3.

On retaining SBI's ratings, the agency said, "Given the amount of bad loans that SBI has recognised over the years, we believe its asset quality will not come under significant pressure."

But it sees a 90 bps spike in SBI's NPAs at 6 percent in the March quarter from 5.1 percent in September quarter.

Moody's said, "The affirmation of the ratings also take into account SBI's strong liquidity and funding position. As the largest bank by assets and deposits, SBI accounts for around 16 percent of system loan and 17 percent of system deposits as of June 2015."

The key remaining asset quality challenges is SBI's exposure to highly leveraged corporates that remain classified as standard assets, despite these groups showing weak debt-to-Ebitda and interest coverage ratios, the agency added.

The agency has also affirmed the senior unsecured debt and senior unsecured medium-term note programme, issued through SBI's London branch at Baa3, apart from retaining SBI's baseline credit assessment at Ba1.

Moody's has also retained the ratings on the foreign currency subordinated MTN and foreign currency junior subordinate MTN programme at (P)Ba1 and (P)Ba2, respectively.

The agency has a positive outlook on SBI's long-term deposit and senior unsecured debt issued through the London branch.

The agency notes that SBI has been struggling with poor asset quality since 2011 when GDP growth fell to under 9 percent. In particular, high corporate leverage and stalled infrastructure projects led to rising levels of non-performing loans and restructured loans.

In the December quarter, SBI's NPAs increased to 5.1 per

cent from 4.25 percent in March 2015. This was primarily because RBI in December asked banks to clean up their books by March 2017 and provide for all the doubtful assets by March 2016.

Expecting a stable asset quality from the April-June quarter, Moody's pointed out that the bank's new impaired loans formation rate has fallen since December 2014 quarter except for the quarter ended December 2015. In addition, SBI has shown a greater bias towards better rated corporates in its new loan originations.

It also pointed to the higher loss absorption buffer saying in the December quarter bank's provisioning coverage stood at 65 percent, down from 69 percent at March 2015, which is a level that is much lower than similarly rated global peers.

Moody's also expects SBI to maintain its capitalisation levels at 9-9.5 percent in FY17, because of its strong core earnings (pre-provisioning profits) compared to other public sector banks.

Meanwhile, in a separate note from Singapore, Moody's also retained IDBI Bank local currency and foreign currency bank deposit ratings at Baa3/P-3 apart from affirming its Baa3 senior unsecured debt and senior unsecured medium-term note programme ratings at (P)Baa3 and baseline credit assessment at Baa3 (cr) and the subordinated MTN rating at (P)B1.

The outlook on the long-term deposit and senior unsecured debt ratings is stable, Moody's said.

Though IDBI's asset quality is weak, with a gross nonperforming loan ratio of 8.9 percent as of December 2015 quarter, Moody's said, "With its baseline credit assessment being already positioned at b1, its credit profile already factors in a significant amount of asset quality stress and also that its basic metrics are in line with the other rated public sector banks.