SP cuts SBI rating on weak asset quality concerns

Global rating agency Standard & Poor's (S&P) today revised downward credit rating of State Bank of India (SBI) by a notch to 'BBB-' on expected deterioration in the asset quality. "We revised the stand-alone credit profile (SACP) of SBI to 'BBB-' from 'BBB' and that of UBI (Union Bank of India) to 'BB+' from 'BBB-' based on our anticipation of the banks' weak asset quality performance," S&P said in a statement.

'BBB-' rating considered as the lowest investment grade by market participants while 'BB+' is considered highest speculative grade by market participants. "We revised the SACPs of SBI and UBI because we expect the banks' asset quality to remain weak and credit costs to stay high," the rating agency said.

The rating firm also expect SBI's and UBI's asset quality to remain stressed in the fiscal years ending March 31, 2013, and 2014, partly due to continued slippages in their restructured loan books. "We have revised our risk position assessment on these banks to 'moderate' from 'adequate,' as our criteria define those terms," it said.

SBI's gross non-performing assets (NPA) ratio of 5 per cent (on a stand-alone basis) as of June 30, 2012, is the highest among the Indian banks, it said. On a stand-alone basis, the NPA level in the mid-corporate portfolio is 9.3 per cent while in agriculture it is 9.8 per cent. The rating agency noted that these portfolios are particularly stressed.

NPAs in UBI's agriculture portfolio have also surged. Moreover, the bank has asset concentration in its infrastructure portfolio, especially in the power sector, which is facing challenges, such as fuel shortages, delays in securing environmental clearances, and a slow pace of tariff reforms, it said.

"We have lowered the issue ratings on UBI's hybrid issues (upper Tier 2 subordinated and hybrid Tier 1 notes under the bank's medium-term notes program) to 'B+' from 'BB'," it said. The bank's SACP is in a speculative-grade category. Therefore, in line with our criteria, we rate the hybrid issues three notches lower than the SACP, it said. However, it has affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings on seven government-owned banks including SBI and UBI.

"All the banks we rate in India have a negative outlook. This reflects the outlook on the sovereign rating on India," it said. S&P does not rate Indian banks above the sovereign rating because of the direct and indirect influence the sovereign in distress would have on a bank's operations, including its ability to service foreign currency obligations. Accordingly, the ratings on these banks would be lowered if sovereign rating is downgraded.

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