Investors were left with a grim face on Tuesday after shares of State Bank of India (SBI) fell 4%, the worst fall in two years.
Reason: Moody’s Investor Services, the credit rating agency, downgraded SBI to D+ from an earlier rating of C-.
By Moody’s nomenclature, a ‘C’ rating stands for banks which possess “adequate intrinsic financial strength” while ‘D’ is for banks with “modest intrinsic financial strength, potentially requiring some outside support at times”.
“The rating action considers SBI’s capital situation and deteriorating asset quality. Our expectations that non-performing assets (NPAs) are likely to continue rising in the near term — due to higher interest rates and a slower economy — have caused us to adopt a negative view on SBI’s creditworthiness,” said Beatrice Woo, a Moody’s vice president and senior credit officer.
SBI chairman Pratip Chaudhuri told CNBC it’s not a downgrade of the bank, but one of its businesses.
“SBI’s overall rating stays above sovereign,” he said.
He expects capital infusion from the Centre in December or by March. “That will help us revert to our D+ rating,” Chaudhuri said.
SBI’s current Tier-I capital stands at 7.6% against a norm of 8%.
Moody’s believes that India’s largest lender will require at least Rs37,400 crore to bring replenish its Tier-I capital to 8%.
“To put this into perspective, SBI’s ability to absorb losses in a stress situation is below that of the C- rated Indian banks,” Woo said.
While the rating action was specific only to SBI, the concerns on asset quality remain on state-owned banks across the board.
Krishnan ASV, Pankaj Agarwal and Aadesh Mehta, analysts with Ambit Capital, said in a note after the Moody’s move that SBI’s lower capital and high delinquencies are not going to improve in the near term.
This will eventually increase the cost of capital for SBI and other public sector banks which are pegged on it.
Bankers agree. A senior official with a leading public sector bank said because SBI has a sovereign rating, a downgrade can impact peers.
“Unless the government sends a clear message that they are behind public sector banks and will inject capital when required, rating agencies will continue with their assessment,” he adds.
Some say Moody’s deductions are a little far-fetched. “In their stress case assessment, Moody’s is expecting SBI’s gross non-performing assets to touch 12%, which is unrealistic,” says Bhavesh Kanani, analyst with Centrum Broking.
“If such a scenario were to be even contemplated, we expect the Government of India (GoI) to accord the highest possible priority to SBI’s recapitalisation efforts,” said Ambit’s Krishnan, Agarwal and Mehta.
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