Covid-19 impact: Moody's lowers SBI's baseline credit assessment to 'ba2'

The rating agency, however, affirmed SBI's Baa3 deposit ratings

Rating agency Moody’s has downgraded State Bank of India’s (SBI’s) baseline credit assessment (BCA) from “ba1” to “ba2” as economic shock from the Covid-19 pandemic may aggravate the weakening borrowers’ credit profiles. It would hurt asset quality of India banks. The agency affirmed SBI’s Baa3 deposit ratings.

The downgrading reflects that bank’s asset quality and profitability will deteriorate. The resultant weakening in internal capital generation will reverse improvements in its financial metrics achieved over the past two years.

SBI’s bad loan ratio was potentially understated as it does not capture loans on which the bank has granted payment deferrals. 

Also, its common equity ratio for risk weighted assets is low when compared to similarly rated global peers. It has maintained SBI’s rating outlook, where applicable, as negative, in line with the outlook on India’s sovereign rating.

This action concludes the review initiated on SBI’s BCA, adjusted BCA, junior securities on June 2. Prior to the review for downgrade, Moody’s had expected that improvements to SBI’s asset quality and profitability would result in financial metrics in line with global peers with ba1 BCAs.

SBI's asset quality improved in the quarter ended June 2020, with its gross non-performing loan ratio declining to 5.4 per cent from 7.5 per cent a year ago. However, the ratio is potentially understated because it does not include loans on which the bank has granted payment deferrals. 

As of June 2020, about 9.5 per cent of SBI's loans were under a repayment moratorium until the end of August 2020. After the loan deferment period ends, the RBI has permitted Indian banks to restructure loans to borrowers whose earnings and businesses have been impacted by the pandemic. 

In line with the trend for other Indian peers, SBI is also expected to restructure loans. However, uncertainty around the length and depth of India's economic slowdown make it difficult to estimate what portion of restructured loans will eventually turn into NPL’s.

SBI's capitalization —as measured by tangible common equity (TCE) relative to adjusted risk-weighted assets of 8.5% as of March 2020 —low when compared to similarly rated global peers.