Moody's Investor Service has downgraded Baseline Credit Assessment (BCA) of State Bank of India (SBI) to ba2 from ba1. The downgrade reflects ratings agency's view that SBI's asset quality and profitability will deteriorate on back of economic shock from the coronavirus pandemic in an already slowing economy.
Moody's has also downgraded SBI's foreign currency preferred stock non-cumulative MTN program rating to (P)B2 from (P)B1, and the rating of the preferred stock non-cumulative (Basel III compliant Additional Tier 1 securities) bond issued out of its DIFC branch to B2(hyb) from B1(hyb). Moody's has maintained SBI's rating outlook, where applicable, as negative, in line with the outlook on India's sovereign rating.
"The economic shock from the coronavirus pandemic will exacerbate an already material slowdown in India's economic growth, weakening borrowers' credit profiles and hurting Indian banks' asset quality. Prolonged financial stress among rural households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of bank's balance sheet over the past two years," the agency said in a statement on Tuesday.
"The downgrade of SBI's BCA to ba2 from ba1 reflects Moody's view that the bank's asset quality and profitability will deteriorate. The resultant weakening in internal capital generation will reverse improvements in the bank's financial metrics achieved over the past two years," it further added.
Moody's said that it earlier expected that improvements to SBI's asset quality and profitability would result in financial metrics in line with global peers with ba1 BCAs. "SBI's asset quality improved in the quarter ended June 2020, with its gross non-performing loan ratio declining to 5.4 per cent from 7.5 per cent a year ago. However, the ratio is potentially understated because it does not include loans on which the bank has granted payment deferrals. As of June 2020, about 9.5 per cent of SBI's loans were under a repayment moratorium until the end of August 2020," the agency said.
Moody's said it expects SBI to restructure loans once the loan deferment period ends. However, it noted that the uncertainty around India's economic slowdown makes it difficult to estimate what portion of restructured loans will eventually turn into non-performing loans.
The agency also stated that SBI's capitalisation will remain lower than similarly rated global peers. "While SBI's stakes in listed subsidiaries present potential sources of capital, Moody's expects that the bank's sustainable capitalisation will be lower than global peers, in line with the expectation of the bank's management," it added.
SBI's ratings are unlikely to be upgraded in the next 12-18 months, considering the negative outlook. The rating outlook could be changed to stable if India's rating outlook is changed to stable. The reverse of this also possible, the agency noted.
"Moody's could downgrade SBI's ratings if India's sovereign rating is downgraded, reflecting the high interlinkages between the banks' credit profile and that of the government. Moody's could also downgrade SBI's BCA if there is a material decline in capital because of a strain on asset quality and profitability beyond Moody's current expectations," the agency said.