Expecting the nation's largest lender SBI to fare better than its peers, global rating agency S&P today retained its long-term as well as short-term ratings on the bank with a stable outlook.
"We expect SBI performance to remain better than its public sector peers and therefore we are affirming our 'BBB-' long-term and 'A-3' short-term issuer credit ratings on the bank," S&P said in a note.
It said the stable outlook reflects its expectation that the bank will maintain its financial profile over the next 24 months.
The agency also reaffirmed its 'A-3' short-term issuer credit rating on State Bank of India apart from affirming all the issue ratings on the bank's debts.
"The affirmed rating on SBI reflects the bank's undisputed market leadership, supported by a strong domestic franchise and high customer confidence," S&P Global Ratings Credit Analyst Amit Pandey said, adding, these factors translate into a good funding profile for the bank.
SBI's stressed asset quality and moderate capital temper these strengths.
With over 20 per cent market share, SBI is the undisputed leader in terms of assets, loans, and deposits underpins its business position and this will only get further solidified after the bank's proposed merger with its subsidiaries, it noted.
"The strong business position also contributes to the bank's good funding profile. Consumer and market confidence in SBI remain strong as demonstrated by the bank benefiting from the "flight to quality" during the 2008 global financial crisis," the report noted.
Pandey, however, warned that like most of the other public sector banks, SBI's asset quality is also likely to remain stressed, given the tepid domestic industrial activity, subdued corporate sector profitability, and high leverage in certain segments.
Individually, he said, managing a large organisation and aligning associates' policies and asset quality recognition norms in line with its own would be a challenge.
On recapitalisation, he said this will remain moderate.
"We estimate that the bank's pre-diversification risk-adjusted capital (RAC) ratio to stay 6-6.5 per cent over the next 12-18 months. We expect its earnings to remain under pressure in fiscal 2017 due to high credit costs and depressed margins," he added.
"In our opinion, lower earnings will not be sufficient to
support SBI's average loan growth. The recent capital issuances and revaluations reserve should, however, provide a fillip to the bank's capitalisation.
"Any major capital issuance such as the bank's RAC ratio improve to 7 per cent and sustains at that level could have a positive impact on the bank's capital and earnings and SACP," Pandey warned.
He also said the agency does not see any downside risk to the rating nor does it see any upside potential because it would not rate the bank above the sovereign rating and does not expect to upgrade the sovereign rating in the next 18-24 months.