SBI profitability may stay under pressure for 6-8 quarters: Moody's

ICICI Bank can absorb higher level of credit cost due to better operating profitability

Global ratings agency Moody’s said on Wednesday State Bank of India (SBI)’s profitability metrics could face lingering pressure as it spends the next six-eight quarters for rebuilding its balance sheet buffers.

In contrast, SBI’s private sector counterpart ICICI Bank had seen significant improvement in operating profitability which would allow it to absorb a higher level of credit cost, it said.

The rating agency underlined stablisation of underlying asset quality at SBI. “We believe that recent developments provide further confirmation that it has moved past the worst of its latest asset cycle," says Alka Anbarasu, Moody's vice-president and senior analyst.

SBI’s new impaired loan formation had slowed. This development was a sign that, barring new adverse shocks, its delinquencies in this cycle had peaked. “By contrast, ICICI's asset quality has deteriorated over the last few quarters, and corporate loans will remain under pressure as some of its corporate customers show weak debt servicing metrics," said Srikanth Vadlamani, a Moody's vice-president and senior credit officer. Vadlamani said ICICI Bank exhibited a meaningful exposure to large corporates, and the exposure represented a key source of risk for the bank's asset quality.

On the issue of loss-absorbing buffers, Moody's said such buffers for SBI were weak. The bank’s profitability would remain under pressure as it rebuilds buffers.

In fact, a key weakness of SBI’s credit profile was its thin loss-absorbing buffers,  making its profit metrics highly sensitive to the credit-loss cycle.

SBI reported a 2.2 per cent jump in credit costs in the third quarter ended December 31, 2015, for the financial year ended March 31, 2016, against 1.5 per cent in FY 2015.

This situation consumed 81 per cent of SBI’s pre-provisioning income and reduced its annualised return on assets to 0.21 per cent from 0.68 per cent over the same period. By contrast, ICICI demonstrated significant buffers to withstand a meaningful deterioration in its asset quality, said Moody’s.

ICICI has seen significant improvement in its core operating profitability over the last few years, with its pre-provision income (PPI)/average assets increasing to about 3.2 per cent in FY15, from nearly 1.9 per cent in FY09.

The increase in ICICI’s core profitability was driven by structural improvement in its funding profile, as well as higher net interest margins and better cost-to-income ratios, it added.