S&P warns of pressure on SBI's interest margins

Rating agency Standard and Poor’s (S&P) on Monday said India’s largest lender, State Bank of India (SBI), may see pressure on its net interest margins and profitability in the current environment, which is marked by increasing competition and high inflation.

In its industry credit outlook, S&P said the public sector bank had a strong market position and a sound funding and liquidity profile. Its loan quality, though adequate, was under pressure and it had maintained a stable outlook on SBI ratings (BBB-/Stable/A-3).

Indian banks are benefiting from the economy's sound growth, favourable demographics and under-penetration. However, high inflation, increased competition and evolving risk management practices would remain key challenges, the rating agency said.

SBI reported a worse-than-expected performance in 2010-11. The underperformance was mainly due to a sharp rise in credit costs and pension-related provisions in the fourth quarter of the last financial year. Fresh slippages in non-performing assets and tightened regulatory norms on provisioning resulted in its high credit provisions.

Besides pension-related costs, SBI also made adjustment to its pension liabilities. It charged Rs 7,900 crore to reserves for pension liabilities, which led to a significant drop in tier-I capital adequacy ratio—from 9.57 per cent to 7.77 per cent.

The bank would get substantial extraordinary support from the Union government in a distress situation because of the bank’s systemic importance, S&P said.

Commenting on the performance of Indian banks in 2010-11, S&P said earnings pressure eased in the financial year ended March 31. Banks regained pricing power due to high demand for credit and the introduction of base rate—which set a floor for lending rate—also boosted profitability.

They benefited by delaying the re-pricing of liabilities amid rising interest rates.

However, trading gains fell as interest rates rose and credit costs increased in sync with asset quality pressure. The non-performing loan ratios of Indian banks stood at about 2.6 per cent in 2010-11. The ratio is expected to start declining in 2011-12, later than for banks in other regions. This is because RBI allowed banks to restructure loans at the peak of the financial crisis without classifying these as non-performing.