STATE BANK OF INDIA
Fitch Ratings has affirmed
The Outlook is Stable. Fitch has also affirmed the bank's Viability Rating (VR) at 'bb' and its Government Support Rating (GSR) of 'bbb-'. A full list of rating actions is below.
Key Rating Drivers
Government Support Underpins Rating: SBI's IDR is support-driven, with the GSR above the VR. SBI's GSR is the same as
High Systemic Importance: SBI's GSR reflects Fitch's view that the state has a higher propensity to extend extraordinary support to SBI due to its systemic importance. SBI is the largest Indian bank, the state has 56.9% controlling ownership and it has a broader policy role than peers.
Supportive Operating Environment: Fitch has revised the operating environment (OE) score to 'bb+' from 'bb' reflecting our view of structural improvements since the onset of the pandemic. The agency forecasts
Importantly,
Dominant Presence: SBI's business profile score of 'bbb-' is the highest among Indian banks and above the OE score of 'bb+', which reflects our view of SBI's ability to generate business consistently through the cycle while managing risk better than peer state banks. It also reflects SBI's dominant market share, unparalleled domestic reach and better pricing power. That said, government influence can weigh on its traditional business model (loans: 58% of assets), and even more so on its risk appetite, similar to other state banks.
Double-Digit Loan Growth: SBI's loan growth of 16% in the financial year ended
Lower Impaired Loans: SBI's impaired-loan ratio fell to 2.8% in FY23, from 4.0% in FY22, as recoveries and write-offs more than offset fresh bad loans. A more meaningful unwinding of relief loans is likely to test this trend in FY24, but loan impairment charges should stay below 1%, provided there are no negative shocks from the stressed loan pool (1QFYE24: 0.7% of loans). Specific provision cover was stable at 76%, while overdue loans (30-90 days) were negligible at 0.1%. Contingent provisions cover 41% of the stressed Covid-19 pool.
We have revised the outlook on SBI's asset quality score of 'bb-' to positive, from stable, as we expect the four-year average impaired loans ratio to further improve over the near term.
Strengthening Core Profitability: The operating profit/risk-weighted assets (RWAs) ratio improved to 2.4% in FY23 (FY22: 1.7%) driven by lower loan impairment charges, which remained below 1.0% for the second consecutive year. The bank's net interest margin and cost/income ratio also improved, offsetting the impact of rising rates on treasury income. We expect loan-impairment charges and elevated - but largely stable - interest rates to continue to drive higher profitability.
Modest Capital Buffers: Fitch estimates SBI's common equity Tier 1 (CET1) ratio rose by 50bp to 10.8% in 1QFY24 after including quarterly earnings, over FY23. However, buffers remain modest over the 8.6% required minimum CET1 ratio, considering SBI's growing risk appetite, and we expect the ratio to be steady in the medium term. Immediate risks to core equity have eased, given a single-digit net impaired loans/CET1 ratio, but modest buffers mean capital is vulnerable to unexpected losses. We believe SBI has the best access to capital markets among peers, but has no immediate plans to raise core equity.
Deposits Dominate Funding: SBI's funding and liquidity is a strength of its intrinsic credit profile. The loan/customer deposit ratio was broadly stable at around 73% in 1QFY24 (per preliminary disclosures), similar to FYE23, while the share of customer deposits in total funding remained high at 92%. Balance sheet liquidity is robust considering the liquidity coverage ratio and net stable funding ratio of 147% and 116%, respectively.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDR AND GOVERNMENT SUPPORT RATING
The GSR is most sensitive to Fitch's assessment of the government's propensity and ability to support SBI, based on the bank's size, systemic importance, and linkage to the state. Weakening of the government's ability to provide extraordinary support - reflected by negative action on
Negative action on the Long-Term IDR is also likely should Fitch perceive any material reduction in the government's propensity to extend timely support, in which case the agency will reassess the GSR and the bank's Long-Term IDR, although that is not our base case.
VIABILITY RATING
Fitch views SBI's VR - which reflects a moderate degree of financial strength - as reasonably stable in the near term, but it could be downgraded if there is significant deterioration in the OE, or if a heightened risk profile were to become a more binding constraint on the bank's moderate capital buffers.
The deterioration in the OE could manifest through a weakening in all of the following key financial metrics, assuming our assessment of the business profile remains unchanged:
Drop in SBI's CET1 ratio below 10%, irrespective of its capital fungibility and flexibility, and without a credible plan to restore it to closer to the 'bb' CET1 ratio threshold;
Four-year average impaired-loan ratio significantly exceeding 5% (FY23: average of 4.4%); and
Four-year average operating profit/RWA ratio being sustained below 1.25% (FY23: average of 1.8%).
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDR AND GOVERNMENT SUPPORT RATING
Positive sovereign rating action would lead to corresponding changes to SBI's Long-Term IDR, provided the sovereign's propensity to support remains unchanged. An upgrade to SBI's GSR is more probable in the event of a sovereign upgrade than for the other large state banks, even though Fitch views the government's ability and propensity to support those banks as high due to their systemic importance and history of support. SBI is significantly larger than the others and has a broader quasi-policy role, which makes it strategically important to the state. However, an upgrade of the sovereign rating appears unlikely in the near term.
VIABILITY RATING
A VR upgrade is likely if our higher assessment of the OE were to propel the bank's asset quality and capitalisation towards a path of sustainable improvement. The improvement in the OE could manifest through the following stronger key financial metrics:
SBI sustaining a four-year average impaired-loan ratio well below 5%;
Fresh equity injection that supports the accumulation and sustaining of capital buffers at levels above 12%.
At the same time, evidence that SBI can sustain recent reductions in its risk appetite and demonstrate an ability to generate stronger earnings, such as four-year operating profit/RWA well above 1.25% on a sustained basis, without compromising its risk profile could be positive for its overall VR.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The bank's medium-term note programme and senior notes are rated at the same level as the Long-Term IDR, in line with Fitch's criteria. The notes constitute direct, unsubordinated and unsecured obligations of the banks, and rank equally with all their other unsecured and unsubordinated obligations.
The Long-Term IDR (xgs) is driven by its VR, while its Short-Term IDR (xgs) is in accordance with its Long-Term IDR (xgs) and the short-term rating mapping outlined in Fitch's criteria. Senior unsecured long-term ratings (xgs) are assigned at the level of Long-Term IDR (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
SBI's programme rating and senior debt rating will move in tandem with the IDR. Both ratings would be downgraded if the Long-Term IDR is downgraded. They would also be upgraded in the event the IDR is upgraded, although we view this to be unlikely in the near term.
SBI's Long-Term IDR (xgs) will move in tandem with the bank's VR. SBI's Short-Term IDR (xgs) is primarily sensitive to changes in the bank's Long-Term IDR (xgs) and would be mapped as per Fitch's criteria. A change in SBI's Long-Term IDR (xgs) would lead to a similar change in its senior unsecured long-term ratings (xgs).
VR ADJUSTMENTS
The OE score of 'bb+' is above the implied category of 'b' for the following adjustment reasons: economic performance, and size and structure of the economy (positive).
The capitalisation and leverage score of 'bb-' is above the implied category of 'b' for the following adjustment reason: capital flexibility and ordinary support (positive).
The funding and liquidity score of 'bbb-' is above the implied category of 'bb' for the following reason: deposit structure (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
SBI's IDRs and Outlook are the same as
ESG Considerations
SBI has an ESG Relevance Score of '4' for Governance Structure, in line with similarly rated Indian state banks. This reflects our assessment that key governance aspects - particularly board independence and effectiveness, ownership concentration, and protection of creditor and stakeholder rights - are of moderate influence yet are negative for SBI's credit profile, and are relevant to the ratings in conjunction with other factors.
Fitch views SBI's governance to be less developed, similar to other state banks, as evident from significant lending to higher-risk borrowers and segments, which has led to above-average levels of impaired loans and credit losses. The board is also dominated by government appointees, and the bank's business models often focus on supporting government policy, while it already has a healthy appetite for risk. Lending could be directed towards socioeconomic and economic policies, and may include lending to government-owned companies. These factors also drive our view of the bank's state linkages, which influence support prospects and drive the long-term ratings.
Fitch has revised SBI's ESG Relevance Score for Financial Transparency to the sector default score of '3' from '4'. The change primarily highlights Fitch's view that risks from Covid-affected loans under forbearance have receded, despite some limitations in disclosure on such loans. This is because we believe that a large proportion of those stressed loans may actually be covered by government guarantee, which materially minimises the risk of losses from this portfolio. The quality and frequency of SBI's financial reporting and audit processes are also commensurate with a score of '3', and do not weigh materially on our assessment of the bank's intrinsic creditworthiness.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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