State Bank of India - 2008

MARC has assigned a AA+ rating to the proposed senior unsecured ringgit bonds to be issued by State Bank of India (SBI). The rating reflects the bank’s position as the largest commercial bank in India, amidst consolidation in the Indian banking system and intensifying domestic competition from private banks and other public sector banks, and its strong financial profile, underpinned by moderate profitability, favourable asset quality, strong liquidity and sound capitalisation. The rating takes into account the bank’s ownership structure and potential external support from its majority shareholder, the Government of India (GOI), with respect to SBI’s obligations. The positive rating factors are tempered by challenges faced by SBI, notably that of sustaining its growth trajectory and positive market share trends in an increasingly competitive environment, achieving improved efficiency and implementing its merger plans. MARC believes that asset quality will come under some pressure as a result of the rising interest rate environment, the effect of rupee (Rs) appreciation on certain major Indian export sectors and increased household leverage. The rating outlook is stable.

SBI is majority owned by the GOI and is the largest bank in India with a consolidated market share of about 23% for loans and deposits (including its subsidiaries and associates). SBI serves a broad customer base which extends from prime corporates to low-income earners through its vast nationwide network of over 14,000 branches and 84 offices in 32 countries outside India. SBI’s strengths lie in consumer and commercial banking activities, with an emphasis on its home market. The bank’s international operations represent an area of growing strategic importance and focus for the bank. SBI is also present in other key areas of financial services through its non-banking subsidiaries, affording considerable cross-selling potential across units. The bank’s strategy to counter threats to its market dominance from private sector and other public sector banks includes reaching rural India’s ‘unbanked’ population, merging its associate banks with itself and strengthening its franchise with respect to its large corporate client segment. SBI is also leveraging on automation technology and making on-going efforts and initiatives to strengthen its processes, operations and human capital.

SBI’s asset quality metrics are favourable. The bank’s gross non-performing asset (NPA) ratio declined from 7.8% (FY2004) to 2.9% (FY2007). Lower incidence of new problem assets, intensified
recovery efforts, close monitoring of vulnerable loans and the sale of delinquent loans have contributed to improvement in asset quality. Although the health of SBI’s growing retail loans holds increasing significance for the bank’s asset quality, the state of its business and corporate loan portfolio continues to weigh significantly on its overall asset quality metrics. MARC views SBI’s commitment to maintaining a tight credit process as an important determinant of its resilience to a general downturn in credit quality. The credit environment is becoming less benign, and the bank’s very strong loan growth of around 30% for the past three years would result in a less seasoned portfolio and the prospect of higher credit loss provisioning.

SBI’s strong retail banking franchise and vast branch network support its stable and well-diversified customer funding base. As at end September 2007, the bank’s low cost deposits - Current and Savings Account (CASA) ratio was 39.5% and total deposits accounted for approximately 82.7% of total funding. SBI’s liquidity profile is also characterised by its substantial holdings of liquid assets (comprising 30% of total assets), high cash balances, moderate loan to deposit ratio of about 74% as at end September 2007 and reserves with the Reserve Bank of India (RBI). SBI has very good access to the domestic and global capital market as evidenced by its recent debt issuances.

SBI’s profitability is considered to be satisfactory although its profitability measures, notably return on assets (ROA) and return on equity (ROE) are relatively lower compared to its domestic peers. Nevertheless MARC recognises that the bank is pursuing efficiency improvements through technology driven initiatives. Interest income from loans contributes the majority of SBI’s profitability, and provides stable and recurring core earnings which are augmented by the bank’s growing fee income. Meanwhile, monetary tightening and the increasingly competitive operating environment are contributing to margin pressures. While the impact of margin compression on net interest income growth continues to be offset by continuing loans growth, a slowdown in loans growth could affect the bank’s financial performance.

SBI’s capitalization is viewed to be moderately strong given its capital adequacy ratio of 12.3% as of end-March 2007, healthy growth in retained earnings, and ownership by the GOI. SBI’s near-term capital needs are considerable as a result of continuing credit growth and the adoption of Basel II, and Accounting Standard-15 (which will affect SBI’s provisioning for staff retirement benefits). SBI has been shoring up its capital base through an Upper Tier-2 bonds issuance and Hybrid Tier-1 perpetual notes issuance. SBI’s capitalisation is expected to be further strengthened after a proposed rights issue in March 2008. The bank is committed to maintain capital adequacy ratios that are comfortably above the minimum 9% regulatory threshold over the near to medium term.

Major Rating Factors

Strengths

• Largest commercial bank in India with substantial franchise strength which is further enhanced by associate banks, subsidiaries and joint ventures;
• Enlarged geographical reach and increasing international presence;
• Favourable asset quality metrics;
• Strong liquidity, underpinned by high proportion of stable retail funding; and
• Majority ownership by the Government of India which has historically demonstrated strong support for the bank.

Challenges

• Margin pressure stemming from increased competition in lending and deposit-taking;
• Hefty capital requirements to support asset growth and compliance with capital requirements; and
• Merger initiatives may pose some event/strategic risk.