Moody's Investors Service downgraded the country's largest public sector bank's financial strength rating (BFSR), to D+ from C- on account ofasset quality concerns and capital situation.
According to the note, the non-performing assets(NPA) are likely to continue rising in the near term and higher interest rates and a slower economy might weigh on the SBI's profitability and its creditworthiness.
The SBI reported a Tier 1 capital ratio of 7.60% as of 30 June 2011 which is below the 8% Tier 1 ratio that the government of India has committed for maintaining in public sector banks (PSB).
The level pushes the bank into a lower rating band which might provide an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality.
Further, Beatrice Woo, Moody's Vice President, said in the note, "Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital."
The Rs 230 billion rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30%. However, according to Moody's note, the capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating another capital exercise.
Impact on stock price:
Shares of State Bank of India plunged over 4% to touch their 2-year low of Rs 1751.35 on the BSE. At 02:00 p.m., the company's shares were trading 4.8% lower at Rs 1773.
For the years the stock has slipped over 36%.
NPA's and Profitability:
The State Bank of India has a standalone business size of Rs 17 trillion. It enjoys a strong franchise and brand name in the country and has a market share of around 21%.
The bank's net profit has been under pressure for the past couple of quarters. For the first quarter ended June 2011, the net profit fell 45.7% to Rs 1,584 crore because of higher provisioning and a tax rate of 50%.
On the asset quality front, the bank's NPA, as of 30 June 2011, reached a 3-year high of 3.52% of loans and Rs 277,680 million on absolute basis.
Inadequate Capital will now require the Bank to be capitalised by Indian government and the Bank will again have to Dilute its Capital Base. The probably of lower growth and rising NPA's may prompt the Bank to recapitalise and dilute further for at least next 3 Years.
According to the note, the non-performing assets(NPA) are likely to continue rising in the near term and higher interest rates and a slower economy might weigh on the SBI's profitability and its creditworthiness.
The SBI reported a Tier 1 capital ratio of 7.60% as of 30 June 2011 which is below the 8% Tier 1 ratio that the government of India has committed for maintaining in public sector banks (PSB).
The level pushes the bank into a lower rating band which might provide an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality.
Further, Beatrice Woo, Moody's Vice President, said in the note, "Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital."
The Rs 230 billion rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30%. However, according to Moody's note, the capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating another capital exercise.
Impact on stock price:
Shares of State Bank of India plunged over 4% to touch their 2-year low of Rs 1751.35 on the BSE. At 02:00 p.m., the company's shares were trading 4.8% lower at Rs 1773.
For the years the stock has slipped over 36%.
NPA's and Profitability:
The State Bank of India has a standalone business size of Rs 17 trillion. It enjoys a strong franchise and brand name in the country and has a market share of around 21%.
The bank's net profit has been under pressure for the past couple of quarters. For the first quarter ended June 2011, the net profit fell 45.7% to Rs 1,584 crore because of higher provisioning and a tax rate of 50%.
On the asset quality front, the bank's NPA, as of 30 June 2011, reached a 3-year high of 3.52% of loans and Rs 277,680 million on absolute basis.
Inadequate Capital will now require the Bank to be capitalised by Indian government and the Bank will again have to Dilute its Capital Base. The probably of lower growth and rising NPA's may prompt the Bank to recapitalise and dilute further for at least next 3 Years.
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