According to Moody’s Investors Service, the ₹15,000-crore capital raised by State Bank of India via qualified institutional placement is credit positive for the bank as it strengthens its capitalisation and supports credit growth, particularly given the increasing requirements for equity under Basel-III, said Moody’s Investors Service.
Using SBI’s capital position as of March 2017, Moody’s estimated that the capital raised will increase the bank’s common equity tier 1 (CET1) ratio by about 100 basis points to about 10.8 per cent. One basis point equals one-hundredth of a percentage point.
“The additional capital will support the bank’s solvency as its balance sheet expands. We expect that SBI will grow its risk-weighted assets by 15 per cent in fiscal 2018 (which ends March 2018) and fiscal 2019, in line with the growth registered in fiscal 2017.
“These growth assumptions and our expectation that credit costs will remain a key drag on the bank’s profitability lead us to estimate that SBI’s CET1 ratio will be about 10.1 per cent at the end of March 2018 and 9.5 per cent at the end of March 2019,” said the global credit rating agency. Moody’s observed that the capital raised will also eliminate the bank’s dependence on capital infusions from the government to meet the Basel-III minimum CET1 requirement of 7.825 per cent at the end of March 2018 and 8.6 per cent at the end of March 2019 (this minimum includes a capital surcharge imposed by the Reserve Bank of India on SBI owing to the bank’s classification as a domestic systemically important bank).
As such, any infusion from the government will further strengthen the bank’s capitalisation, it added.
SBI’s asset quality has experienced increased stress since June 2011, although Moody’s believes that recent developments provide some confirmation that the bank has moved past the worst of its current asset quality cycle.
Although SBI’s core earnings (pre-provisioning profits) are strong relative to other Indian public sector banks, the agency expects high credit costs to continue eroding profits as the bank devotes resources to rebuilding its provisioning coverage, leaving little for balance sheet growth.
The agency elaborated that credit costs consumed 68 per cent of its pre-provisioning income and reduced its return on average assets to 0.41 per cent in the year ended March 2017 from 0.68 per cent in the year ended March 2015.