SBI's cost to income ratio to dip to 54-55% in two years, says S&P

Agency affirms bank's 'BBB-/positive' issuer rating

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After witnessing a sharp rise in the cost to income (C/I) ratio to 60 per cent in FY24, State Bank of India’s (SBI) C/I ratio is expected to normalise to 54-55 per cent over the next two years. The country's largest lender saw a one-time spike in the C/I ratio in the financial year ended March 2024 (FY24) due to employee expenses, according to S&P Global Ratings.

Its C/I ratio was 56.2 per cent in FY23. The bank could gradually improve its operating efficiency over the next three years as it exploits its digital platforms, the rating agency said in a statement which SBI filed with the stock exchange. S&P Global has affirmed the issuer credit rating of State Bank of India at “BBB-/Positive”.

The bank, in its analyst interaction, has maintained that it would lower the cost to income ratio by focusing on the income side. It made a total provision of Rs 15,877.09 crore towards arrears of wages due for revision, which came into effect from November 2022, according to SBI's annual report for FY24.

Referring to SBI’s capital base, S&P said SBI's capitalisation remains weaker than that of peers. The bank's risk-adjusted capital (RAC) ratio could stay moderate at the 5.5-6.0 per cent level over the next two years, versus 5.9 per cent as of March 31, 2024. Its capitalisation remains lower than that of large private banks in India.

“While SBI has raised substantial additional Tier-1 and subordinated Tier-2 debt, we do not count these funds as equity. This is because we believe the government of India will intervene to prevent these instruments from absorbing losses,” the agency said. It applies this treatment to all public sector banks in India.

On SBI’s asset quality, S&P Global said its asset quality would likely be stable over the next 12-18 months. “We forecast the bank's weak loans—non-performing assets plus restructured loans—will stay at 2.5-3.0 per cent of total loans over the next 12-18 months, versus 3.0 per cent as of March 31, 2024.”

Its credit cost was expected to remain less than one per cent, as asset quality risks may stay contained. Credit costs have been exceptionally low over the last two years, aided by limited new non-performing loans and good recoveries on bad loans.

“However, we forecast credit costs will normalise given rising NPLs in unsecured retail loans. Moreover, strong recovery trends of the past two years may not be sustainable,” it added.