MARC has issued this rating update on State Bank of India’s (SBI) AA+ rating on its RM500 million senior unsecured bonds following a review of SBI’s audited financial results for the quarter ending June 30, 2008. SBI's first-quarter FY2009 results were strong in spite of India’s macroeconomic environment which has become more challenging and uncertain with high inflation and signs of slowdown in the industrial and manufacturing sector. The delinquency rates for retail loans in general have been creeping up for most Indian banks.

SBI’s audited figures for the first quarter FY2009 indicate a 15.1% year-on-year increase in the bank's unconsolidated net profit to Rs16.4 billion but a 12.9% decrease from Q4FY2008. The bank’s CAR has declined slightly to 12.99% (Q1FY2009) from 13.47% (FY2008) with the implementation of Basel II. Delinquent credits remain contained with the gross non-performing assets (NPA) ratio of the bank declining to 2.54% as at end of Q1FY2009 from 3.21% as at end FY2008. In July 2008, the Reserve Bank of India hiked the repo rate (key lending rate) by 50 basis points (bps) to 9% and the bank’s cash reserve requirement will increase by 25 bps also to 9% effective August 30, 2008 with a view to curtail aggregate demand. SBI had recently announced in July 1, 2008 that it was hiking interest rates by 50 bps on all credits linked to the prime lending rate.

SBI is India's largest commercial bank and is 59.7% owned by the Government of India as at end of March 2008. SBI has 15.6% market share of domestic advances and 15.1% market share of domestic deposits as at June 2008. Its size and importance in the Indian banking system is a key rating consideration for its AA+ rating on its senior bonds. SBI derives approximately 89% of its revenue from its domestic operations.

MARC expects SBI to demonstrate a high degree of resiliency relative to most of its domestic peers in relation to challenges in the near-term. The rating outlook is stable, although recent developments in the Indian economy signal increasing asset quality pressures and weaker earnings outlook for the Indian banking sector as a whole, going forward. MARC may revise its rating outlook if the bank's financial fundamentals exhibit visible signs of weakening amid the negative economic pressures and the Indian macroeconomic environment continues to deteriorate.