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The ongoing rounds of nonperforming loan resolutions initiated by the Reserve Bank of India hold the key to the State Bank of India's credit profile, said Moody's Investors Service.
"The resultant haircut on SBI's assets will likely show a substantial impact. Our scenario analysis concludes that SBI can absorb haircuts of up to 50-55 per cent, while maintaining a common equity Tier 1 ratio of above 9.5 per cent at the end of March 2019," it said in a report.
Such a common equity Tier 1 ratio would give the bank some buffer above the minimum regulatory requirement of 8.6 per cent by March 2019, it said.
The scenario analysis assumes about 35-40 per cent of the bank's non-performing assets (NPAs) are resolved under the various resolution processes in the next two financial years, it said.
The report said that SBI is exposed to swings in its credit costs (loan-loss provisions), as it continues to provide for a large stock of problem assets and newly recognised NPAs.
The substantial increase in SBI's NPAs after the merger with its associate banks, uneven adjustments of the economy to recent financial disruptions, and current regulatory efforts to resolve problem accounts, will result in negative pressure on the bank's credit costs.
It also pointed out that a 50 basis points change in SBI's credit costs as a percentage of gross loans will have a 30 basis points impact on its return on assets (ROA).
"On an annualised basis, the bank reported credit costs of 2.6 per cent of gross loans and an ROA of 0.4 per cent in the quarter ended June 2017," it said.