S&P Global Ratings has forecast that State Bank of India’s weak loans (non-performing loans or NPLs, and restructured loans) will remain 2.5-3 per cent of total loans over the next 12-18 months, versus 2.3 per cent as of December-end 2023.

“Asset quality will likely be stable over the next 12-18 months.... Credit costs will likely remain at less than 1 per cent,” said credit analysts Nikita Anand and Shinoy Varghese in a report that affirmed the bank’s issuer credit rating at ‘BBB-/Stable/A-3’.

‘BBB’ is an investment-grade rating that signifies the issuer has capacity to meet financial commitments, but more subject to adverse economic conditions.

The analysts underscored that India’s robust economic growth supports SBI’s loan growth, asset quality, and profitability. The strong deposit franchise of the bank, which is the largest in India with significant geographic and product diversity, also underpins its credit profile.

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The agency said the bank’s risk-adjusted capital (RAC) ratio could stay moderate at 6.0-6.5 per cent over the next two years, versus 6.3 per cent as of March 31, 2023. It observed that SBI’s capitalisation remains lower than that of large private banks in India.

Market leader

“We expect the bank to maintain its market leadership in India’s banking sector over the next two years. Its funding and liquidity will stay strong, supported by high customer confidence. SBI could maintain asset quality that is better than the sector average in India and comparable to similar rated international peers.

“The bank’s capitalisation is likely to stay weaker than that of India’s private sector banks. We continue to factor in a very high likelihood of government support in our ratings,” the analysts said.

When it comes to SBI’s credit rating, S&P Global Ratings’ base case assumes organic loan growth of 15-16 per cent over the next two years, reflecting economic growth; a margin decline of 10-20 basis points (bps) from higher deposit costs; and credit cost below 1 per cent as asset quality risks may remain contained.

Other assumptions include broadly stable profitability with core earnings to average assets of about 1 per cent over the next two years (in line with the 1.1 per cent for the first nine months of 2023 on an annualised basis) and dividend payouts of 20 per cent from net profits.

The analysts noted that as of end-December 2023, SBI had about $780 billion in assets and 22-24 per cent market share in domestic loans and deposits.

“We believe SBI will maintain more diversified revenue and loans than its Indian peers. The bank benefits from revenue contributions from its insurance, cards, and brokerage subsidiaries.

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“Growth in its overseas advances will likely stay in line with India’s trade performance and global demand. SBI’s overseas book accounted for a sizeable 15 per cent of its total advances, with a significant portion to India-based companies,” the analysts said.

Ratings movement

The agency said it could upgrade SBI if it raises its sovereign credit ratings on India over the next two years.

On the downside, it could lower its ratings on SBI if it downgrades India.

“Apart from a change in sovereign ratings, a downgrade of the bank is unlikely. Our assessment of its standalone credit profile will need to weaken by three notches for that to happen. This is a remote risk, in our view,” opined the agency.