SBI's loss buffers too thin, says Moody's

The bank's provision cover for bad loans stands at 65%, much lower than similarly rated global peers

Rating agency Moody’s said thin loss-absorbing buffers are a key weakness in State Bank of India’s credit profile, with a provision cover for bad loans of 65 per cent, much lower than similarly rated global peers and down from 69 per cent at end-March 2015.

SBI’s reported gross non-performing loans (NPLs) rose to 5.1 per cent of the total at end-December 2015 from 4.25 per cent in March, following the Reserve Bank of India’s asset quality review. And, is expected to be around six per cent for the year ending March 2016.

Its ratings for SBI’s local and foreign currency deposits are Baa3/P-3, and also for the senior unsecured debt and senior unsecured medium term note (MTN) programme, issued out of the London branch.

The affirmation factors in SBI’s strong liquidity and funding position. As the largest bank in India by assets and deposits, it accounted for around 16 per cent of system loans and 17 per cent of system deposits as of end-June 2015.

Moody’s said given the uncertainity surrounding corporate asset quality, credit cost will continue to remain high. It poses a key drag on the bank’s profitability levels, until the NPL formation rate comes down further.

Despite the pressure on its profits, SBI can maintain its capitalisation levels, such that its CET-1 ratio will be 9-9.5 per cent for the year ending March 2017. Its strong core earnings (pre-provisioning profits) compared to other public sector banks should help it absorb potential provisioning expenses.