Standard and Poor’s today said State Bank of India’s (SBI) jump in profits show resilience against downside and that the lender has the financial strength to withstand tough operating conditions in the next 12 months.
However, its asset quality profile could come under pressure. SBI’s gross non-performing loans could rise to increase to 8.5-9.5 per cent of customer loans from 5.9 per cent, including pro forma slippages over the next 12 months. In comparison, the industry average for NPLs is about 2.5-3.5 percentage points higher than SBI's.
S&P in a statement said it has forecast SBI's credit costs to be elevated at 2-2.5 per cent. For the banking industry, credit costs could be 0.5-1 percentage point above SBI's.
Its performance in the second quarter ended September 30 was broadly in line with expectations of a rebound after the lockdown.
It has a dominant market position and strong deposit franchise and liquidity. The very high likelihood of government support, if needed, provides a cushion to accentuated downside risks, S&P added.
SBI's performance is expected to be better than the industry average--weaker than private sector peers' but stronger than public sector peers, it added.
Referring to the amount of restructuring, the rating agency said it is too early to conclude the extent of loans that it will ultimately restructure given the ongoing pandemic and borrowers have until December 31 this year.
Weak borrowers (those rated 'BB' and below) will likely continue to get weaker and be restructured or become nonperforming. The bulk of SBI's borrowers are affiliated with the Indian government or strong corporate groups. Therefore, SBI's restructured loans will likely be lower than the industry average. That said, weakness in some large corporate entities may hit the bank's stressed assets.
SBI's capitalisation will remain weaker than that of private sector peers. While the bank has raised substantial additional Tier-1 and subordinated Tier-2 debt over the past few months, S&P does not count these funds as equity because it believes the government of India will intervene to prevent these instruments from converting into equity or absorbing losses.
The bank's risk-adjusted capital ratio is expected to be 5-5.5 over the next two years, compared with 5.6 per cent as of March 31, 2020.
SBI’s profitability could increase to 0.9 per cent from 0.5 per cent as the economy rebounds and stress assets are resolved in the next two years, the agency added.