“The resultant weakening in internal capital generation will reverse improvements in the bank's financial metrics achieved over the past two years,” the ratings agency observed.
Moody’s Investors Service said on Tuesday it has downgraded State Bank of India’s baseline credit assessment (BCA) and adjusted BCA to ba2 from ba1. The agency attributed the downgrade to an expected delay in the recovery in asset quality and profitability at the country’s largest lender due to the deepening economic slowdown.
Moody’s said it was unlikely the rating would be upgraded in the 12-18 months though the rating outlook could be changed to stable if India’s rating outlook is changed to stable. Moody’s could downgrade SBI’s ratings if India’s sovereign rating is downgraded.
The downgrade 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,” the ratings agency observed.
It pointed out that while SBI’s asset quality had improved in the quarter ended June, with the gross non-performing loan ratio declining to 5.4% from 7.5% a year ago, the ratio is potentially understated because it does not include loans on which the bank has granted payment deferrals. As of June, about 9.5% of SBI’s loans were under a repayment moratorium which would end on August 31.
Moody’s has also downgraded SBI’s foreign currency preferred stock non-cumulative MTN programme rating to (P)B2 from (P)B1and 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). It has affirmed thelong-term local and foreign currency deposit ratings of the lender at Baa3. The deposit ratings of SBI are at the same level as India’s Baa3 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,” the agency observed.
It added that 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.