Thursday, Mar 27, 2008
MARC has assigned a rating of AA+ to the proposed RM500 million 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 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 approximately 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 (for SBI group) 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.
SBI’s asset quality metrics are favourable. The bank’s gross non-performing asset 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. 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.
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. SBI has very good access to the domestic and global capital market as evidenced by its recent foreign 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. 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.
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. 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.
SBI is majority owned by the GOI and is the largest bank in India with a consolidated market share of approximately 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 (for SBI group) 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.
SBI’s asset quality metrics are favourable. The bank’s gross non-performing asset 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. 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.
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. SBI has very good access to the domestic and global capital market as evidenced by its recent foreign 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. 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.
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. 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.