ICRA has reaffirmed the 'AAA' rating assigned earlier to the Rs 4.25 billion Lower Tier II bonds of State Bank of Mysore (SBM).The outlook on the rating is stable. ICRA has also reaffirmed the 'A1+' rating assigned earlier to the Rs 90 billion Certificate of Deposit (CD) programme of SBM.

ICRA takes note of SBM's relatively healthy deposits profile among the State Bank associates, with CASA deposits (about 33% of total deposits as in Dec 2013), reduction in the high cost and bulk deposits (about 17% of total deposits as in Dec 2013 from about 25% in March 2013) and its comfortable liquidity profile. However, pressure on earnings and solvency of SBM may persist in the medium term owing to pressure on its asset quality.

Gross NPA% of SBM increased from 4.53% as on Mar. 31, 2013 to 6.56% as on December 31, 2013 owing to increased slippages (gross NPA generation rate of 5.7% for 9M 2013-14 as against 4.3% for 2012-13). Consequently, there has been a decline in the provision cover and a significant deterioration in the solvency profile (Net NPA/ Net worth) of SBM (About 47% as on December 31, 2013 from about 33% as on Mar. 31, 2013). In addition, SBM's standard restructured advances stood at about 7% as on Dec. 31, 2013, despite having negligible exposures to state power distribution companies and Air India, which increases its portfolio vulnerability and could impact its asset quality profile further.

On capitalization front, SBM's capitalization profile is adequate with CRAR at 11.2% and Tier I capital at 8.6% as in Dec 2013, as per BASEL-III. SBM would be wholly dependent on SBI for fresh capital mobilization for meeting the increased capital requirements under Basel III norms as well as for growth. Given the current low levels of internal capital generation, SBM's reliance on SBI for capital funds has increased and, ICRA however expects support from SBI for the same going forward. 

In ICRA's view, over the medium-term the earnings of the bank would be contingent upon its ability to ensure adequate lending spreads, regular repayments from exposures, which have been restructured while also maintaining a control over incremental NPA generations and, improvement in the fee based income. 

Shares of the company declined Rs 6.85, or 1.61%, to settle at Rs 418.05. The total volume of shares traded was 47,844 at the BSE (Friday).