State Bank of India - 2009

MARC has affirmed its AA+ rating on State Bank of India’s (SBI) Senior Unsecured Malaysian Ringgit (MYR) Bonds (2008/2013) of MYR500 million. The rating reflects SBI’s systemically important position as the largest bank in India, its strong market franchise, resilient core earnings and good liquidity position. The rating also takes into account the bank’s ownership structure and potential external support from its majority shareholder, the Government of India, with respect to SBI’s obligations. The positive rating factors are tempered by challenges faced by SBI, notably with regard to improving its operational efficiencies; sustaining its growth trajectory in an increasingly competitive environment; managing its scale of operations, including its ambitious overseas ventures; and sustaining its asset quality. The rating outlook is stable.

Majority-owned by the Government of India (59.41% stake), SBI, along with its six associate banks, operate an extensive network of 16,794 branches, including 134 overseas offices, and together command a consolidated market share of about 24% of deposits and 23% of loans in the Indian commercial banking sector. After steadily losing market share since the liberalisation of the Indian economy in the 1990s, SBI has reinvented itself to meet the competitive challenges in the Indian market. The bank has been regaining market share, especially over the last two years, through an aggressive market share-oriented lending and funding strategy.

As a result, SBI’s loans and deposits grew by 30.2% and 38.1% respectively in FY2009 (FY2008: 23.6% and 23.4% respectively), well above the sector growth rates of 21.2% and 23.0% in FY2009 (year-end March 2009). While the high deposit growth has improved SBI’s liquidity and lowered its loan-to-deposit ratio to 74.0% in 1H2010 from a recent high of 77.5% in FY2007, it has also compressed the bank’s interest margins (1H2010: 2.43%; FY2009: 2.93%) as interest expenses on deposits outstripped interest income from lending. MARC notes that SBI’s deposit base remains stable and well diversified, supported by its strong retail banking franchise and vast branch network. 

SBI’s profitability as reflected by its ROA of 0.99 in 1H2010 (FY2009: 1.08%), although improved from the previous years, is still constrained by lower margins and high operating costs. That said, MARC notes that the bank’s profitability has been supported by a stable stream of fee and commission income (above 0.9% of average assets over last three years) mainly due to its large franchise. Nevertheless, going forward MARC expects SBI’s profitability to remain somewhat subdued as margin pressures are likely to persist over the near term, while both credit costs and operating costs increase on the back of higher delinquencies and an aggressive network and head count expansion.
 
SBI’s gross NPL ratio has generally improved over the past five years (FY2004: 7.8%; FY2009: 2.9%), although its gross NPL ratio of 3.0% at end-1H2010 remains slightly weaker than the 2.3% recorded by the sector at end-FY2009. In addition, the bank restructured INR250 billion of loans during FY2009 and 1H2010, which was rather high at 4.4% of gross loans at end-1H2010. In spite of this, MARC notes that SBI’s reserve cover of NPLs was low at 42.9% at end-1H2010 and below the sector average of 51.3% at end-FY2009. Going forward, MARC expects SBI’s asset quality to come under further pressure due to the seasoning of recently granted loans and the expected rise in delinquencies after the lag effect of the economic weakening, especially from the bank’s overseas operations.

Although SBI’s total capital adequacy ratio of 14.1% at end-1H2010 is well above the regulatory minimum of 9%, MARC views the bank’s capitalisation to be modest considering the challenges inherent in its operating environment, the very low reserve coverage of NPLs and recent aggressive overseas expansions. Considering SBI’s systemic importance to the domestic economy, MARC opines that the Government of India is likely to be supportive of SBI’s capital needs, as has been demonstrated in the past. However, considering the government’s fiscal limitations and current economic priorities, it is rather unlikely that it would inject additional capital to fund the bank’s growth aspirations at this stage.


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