Moody's cuts SBI's debt rating to 'Baa3'

Global rating agency Moody's on Monday downgraded the senior unsecured debt and local currency deposit rating of India's largest bank State Bank of India (SBI) by a notch to 'Baa3' from 'Baa2', citing asset quality and recapitalisation concerns .

"A combination of increasing pressure on credit fundamentals and ongoing reliance on fiscally constrained government to maintain capital at levels desired by regulators argue for appropriateness of supported debt and deposit ratings at a level no higher than the sovereign," Moody's said in a statement.

The bank could not be immediately contacted for comments.

SBI's revised rating for the senior unsecured debt and local currency deposit instruments would now be Baa3 from the earlier Baa2, it said, revising down the outlook on the bank's financial strength rating to negative from stable.

Explaining the rationale behind the action, Moody's said the ongoing gloom on the economic front will result in the asset quality, with its loan impaired ratio already touching 8.6 per cent, with a heavy increase in the June quarter.

"While there may be a seasonal element to this rise, the spike in NPLs illustrates that the bank's asset quality is under pressure," it said.

On the recapitalisation front, Moody's said SBI will have to compete with other state-run banks for its share in the Rs 14,000 crore allocated in the budget.

The high loan growth of up to 20 per cent as against the earlier 15 per cent, increasing asset quality troubles and lower margins indicate that the bank's capital levels will decline without external injection, the Moody's said, adding that SBI will require an infusion this fiscal.  

"Given the importance of expected capital injections to maintain SBI's Tier 1 ratio above the regulator's 8 per cent target, Moody's believes it is no longer appropriate to assign a higher supported rating to SBI than that of the sovereign," the rating agency said.

Moody's said though the outlook of the rating is "stable", un upgrade on the revised rating is "unlikely" given the challenging economic climate.

The deteriorating asset quality and issues over low Tier-I capital had led Moody's to downgrade SBI's overall rating to 'D+' in late 2011. The D+ credit rating has been re-affirmed by the rating agency, it said in the statement.