State Bank of India has to increase and sustain the level of its Tier-1 capital, and contain its asset quality over an extended period in order to raise its stand-alone rating, which on Tuesday was downgraded to D+ from C-, said international rating agency Moody's.
The Rs 23,000-crore that SBI is seeking to mop-up through a rights issue would raise its Tier 1 ratio to approximately 9.3 per cent. However, the capital deployed for loan growth (assuming 15 per cent growth per annum) over the next three fiscal years will cause the Tier 1 ratio to fall below 8 per cent, thereby necessitating another capital raising exercise, the agency said.
SBI's rights issue has been in a limbo for the last one year. Faced with constraints on the revenue front due to economic slowdown, capital infusion by the Government looks a difficult prospect, said analysts.
On the asset quality front, the bank's non-performing assets, as of 30 June 2011, reached a three-year high of 3.52 per cent of loans and Rs 27,768 crore on gross basis.
Against the backdrop of a slowing economy and higher interest rates, the rising trend evident in SBI's new NPA formation rate since 3QFY11 will continue, said Moody's. Therefore, Moody's expects that SBI's potential credit costs will be relatively high in the near-term.
NPA — as a percentage of the bank's Tier 1 capital ratio — is now about 43 per cent.
According to Mr Ajay Parmar, Head Institutional Research, Emkay Global, while a downgrade in rating is a negative for the bank, it is only one of the criteria. In addition to this, investors would also look at factors like size of the bank and risk portfolio.
“This rating should be seen as more of a precautionary measure. Once the Government infuses capital into the bank, the rating will be upgraded. It is only a matter of time,” he said.