State Bank of India fails the stress Test of Moody's

 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. 

B.of A, Wells Fargo, Citigroup down graded by Moodys

Moody's Investors Service lowered the debt ratings for Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., saying it is now less likely that the U.S. government would step in and prevent the lenders from failing in a crisis.

The ratings firm said Wednesday that it believes the government is likely to provide some level of support for financial institutions, but is also more likely now than during the 2008 financial crisis to allow a large bank to fail should it become financially troubled.

The downgrades were widely expected after the three banks were placed on review by the ratings agency in June. They also stem partly from new laws that went into effect under the Dodd-Frank Wall Street Reform Act that was passed last year. The new law ended the possibility of the government bailing out a large financial firm and creates a way to liquidate failed financials.

Bank of America was the worst hit - with a two-notch downgrade in its key long-term debt ratings to Baa1 from A2. Wells Fargo's long-term debt was downgraded by one notch to A2 from A1, while Citigroup's rating remained the same at A3. However, Moody's downgraded Citi's short-term debt.

Moody's also downgraded the rating on both Bank of America and Wells Fargo for deposits.

All of the ratings are investment grade.

Credit Agencies under Fire from Central Bankers. Risk Management under threat ..?

The Role of credit rating agencies was exposed, during the Lehman Crisis. The Integrity and validity of the standards were put question. In the recent times, the role of credit agencies has again came into discussion, during European Debt Ratings for Greece, Spain et.al. Jean Paul Trichet, ECB Chairman, was candid to blame the Agencies for there Role, for panicking and destabilizing the Debt Markets.  The On Going US Debt Crisis may also evoke a similar response, which is being underplayed for unknown reasons

                                    The ensuing report shows, How the importance of rating Agencies may be cut down in rating US Debts. The risk management shall now on be more difficult..?