SBI's capital raising credit positive, removes dependence on govt: Moody's

Yet, high credit costs may continue to erode profits as SBI will rebuild its provisioning coverage

Rating agency Moody’s on Monday said the State Bank of India’s (SBI) raising of equity capital of Rs 15,000 crore was “credit positive”, meaning the bank’s rating could be raised as it strengthens the lender’s capitalisation and supports credit growth.

The fortification of the capital base is crucial, given the increasing requirements for equity under Basel III. Last week, the SBI (Baa3/Baa3 positive) had raised Rs 15,000 crore through a qualified institutional placement (QIP).

The SBI raised equity capital by selling 522 million shares at Rs 287.25, the largest share sale in the secondary market by a bank. The issue opened on June 5 and the demand exceeded Rs 27,000 crore.

Besides equity infusion, the country’s largest lender is focusing on shedding non-core investments like its stake in the National Stock Exchange and UTI Mutual Fund.

Using the SBI’s capital position as of March 2017, its Common Equity Tier 1 (CET1) ratio is expected to increase by about 100 basis points to about 10.8 per cent. The additional capital would support the bank’s solvency as its balance sheet expanded, Moody’s said.

The agency said the SBI’s risk-weighted assets were estimated at 15 per cent in FY2018 and FY2019, in line with the growth registered in FY2017.

Its advances rose by 7.8 per cent to Rs 16,27,273 crore for the standalone entity in FY17. Taking into account the loans of associate banks, the merged entity’s book rose by 1.42 per cent to Rs 18,96,887 crore in the year ended March 2017.

Moody’s said growth assumptions and credit costs, the amount set aside for bad loans, would remain a key drag on the bank’s profitability. As a consequence, the SBI’s CET1 ratio will be about 10.1 per cent at the end of March 2018 and 9.5 per cent at the end of March 2019.

The equity capital will do away with the SBI’s dependence on capital support from the government to meet the Basel III minimum CET1 requirement norms. After the QIP, the shareholding of the government in the merged entity will be 57.07 per cent.

The bank has to maintain a minimum CET1 of 7.82 per cent by the end of March 2018 and 8.6 per cent by the end of March 2019.

This minimum capital requirement includes a capital surcharge imposed by the Reserve Bank of India on the SBI owing to the bank’s classification as a domestic systemically important bank.

As such, any capital infusion by the government will further strengthen the bank’s capitalisation.Moody’s said the SBI’s asset quality had experienced increased stress since June 2011, although recent developments provided some confirmation that it had moved past the worst of its current asset quality cycle. 

The stressed assets — gross non-performing loans plus standard restructured advances — rose to Rs 1,48,977 crore in March 2017 from Rs 1,42,353 crore in March 2016.

Its credit costs for the standalone entity rose by 19.5 per cent to Rs 32,247 crore in FY2017 from Rs 26,984 crore in FY2016. Its provisions coverage ratio has improved to 65.95 per cent in March 2017 from 60.69 per cent a year earlier. Moody’s said the SBI’s core earnings (pre-provisioning profits) were strong relative to other Indian public-sector banks. Yet, high credit costs may continue to erode profits as the SBI devotes resources to rebuilding its provisioning coverage, leaving little for balance sheet growth. 

Credit costs consumed 68 per cent of its pre-provisioning income and reduced its return on average assets to 0.41 per cent in the year ended March 2017 from 0.68 per cent in the year ended March 2015, it added.

Common Equity Tier 1 (CET1) ratio

March 2017: 10.8%

March 2018: 10.1%

March 2019: 9.5%

*the estimate based 15% growth risk-weighted assets

Source: Moody’s presentation