State Bank of India - 2010

MARC has affirmed its AA+ rating on State Bank of India’s (SBI) Senior Unsecured Bonds of RM500 million. The rating reflects SBI’s very high systemic importance as the largest bank in India, its robust market franchise, stable income generation and strong liquidity position. The rating also incorporates SBI’s ownership structure and the likelihood of external support from its majority shareholder, the Government of India, with respect to SBI’s obligations. However, the challenges faced by SBI include maintaining asset quality at an acceptable level, especially in light of its recent aggressive credit growth; managing its enlarged scale of activities, including its overseas operations; as well as its modest capitalisation. The outlook on the rating is stable.

Majority-owned by the Government of India (59.40% stake as at end-November 2010), SBI operates an extensive network of 12,496 branches, including 142 overseas offices as at March 31, 2010, and commands a market share of between 16.0% to 17.0% of deposits and loans in the Indian commercial banking sector. After steadily losing market share since the liberalisation of the Indian economy in the 1990s, SBI has responded strongly by positioning itself as India’s pre-eminent bank. The bank has managed to regain traction in retaining its market share, especially over the last two years, through an aggressive network expansion coupled with the timely rollout of attractive product offerings, especially in the retail market space.

SBI’s loans and deposits grew by 16.5% and 8.4% respectively in FY2010 (FY2009: 30.2% and 38.1% respectively), with the growth path maintained into 1HFY2011 with loans and deposits growing by 15.5% and 12.7% (annualised) respectively. In FY2010, SBI made concerted efforts to shed its high cost bulk deposits and raised more low-cost funds through current and savings accounts (CASA). The bank has also been a beneficiary of the flight to quality and stability in the aftermath of the global financial crisis, as evidenced by an increase in CASA to deposits ratio to 47.8% in 1HFY2011 since FY2009 (39.3%). With the higher level of low cost funds coupled with the increase in prime lending rates, net interest margin increased to a high of 3.3% in 1HFY2011 (FY2010: 2.7%). MARC notes that SBI’s deposit base remains stable and well diversified, supported by its strong retail banking franchise. 

SBI’s profitability as reflected by its return on assets of 1.00% in 1HFY2011 (FY2010: 0.91%), although higher compared to previous years, is still constrained by increasing loan loss provisions and operating costs, and remains lower than its peers. MARC notes that the bank’s profitability has been supported by the uptrend in its fee and commission income over the past three years, mainly due to its large franchise and the rollout of new products and services. Going forward, some immediate pressure on profitability is likely as higher loan loss provisions will be required to satisfy the minimum loan loss coverage ratio of 70%, imposed by the regulator, the Reserve Bank of India. Nonetheless, MARC believes that SBI’s profitability will remain broadly stable.

As at 1HFY2011, SBI’s gross non-performing loans (NPL) ratio weakened to 3.4% from 3.1% as at end-FY2010 due to the impact of the economic downturn and the seasoning of loans which were aggressively booked over the past three years. Nevertheless, MARC notes that the bank’s reserve cover of NPLs is on an improving trend, as indicated by a loan loss reserve coverage of 50.0% as at end-September 2010 (FY2010: 44.4%), or 62.8% after including technical write-offs as allowed by the Reserve Bank of India in meeting regulatory requirements. Meanwhile, MARC also notes that the bank has applied for and obtained regulatory approval to extend the compliance date for the minimum loan loss coverage of 70% as required by the regulator until end-September 2011.

Although SBI’s capital adequacy ratio stood well above the regulatory minimum at 13.2% as at end-1HFY2011, MARC notes that the bank’s capital ratio had declined as a result of its rapid balance sheet expansion. SBI’s current capital ratios appear low relative to its balance sheet and operating environment-related risks. Nevertheless, considering that SBI is a government-owned bank and is of very high systemic importance to the Indian economy, MARC believes that the likelihood of government support for the bank is high. The Government of India has a favourable track record of providing capital support for SBI in the past. This also underpins the stable outlook on the rating.

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