ICRA has reaffirmed the 'AAA' rating assigned earlier to the Rs 6.25 billion Lower Tier II bonds of State Bank of Travancore (SBT). The outlook on the rating is stable. ICRA has withdrawn the 'AAA' rating with a stable outlook assigned to the Rs 1.95 billionLower Tier-II bonds of the bank, as the instrument has been fully repaid and there is no amount outstanding against the rated instrument. 

The highest credit quality rating factors in SBT's strong parentage, operational and management synergies with State Bank of India (SBI) and, SBT's well established franchise in its area of operations (mainly Kerala) backed by the 'State Bank' brand. SBT is subsidiary of SBI, with SBI holding 75% stake in SBT.

SBT's strong franchise is likely to ensure adequate growth in the credit and deposits of the bank. However, pressure on earnings and solvency of SBT may persist in the medium term owing to pressure on its asset quality.

The bank witnessed sharp increase in the fresh slippages during FY2014, with NPA generation rate at about 7.4% for the period as compared to 4.4% in FY2013, ability of the bank to control incremental slippages and improvement in the overall asset quality would be critical from a credit perspective. 

In ICRA's view, over the medium-term the earnings of the bank would be contingent upon its ability to ensure adequate lending spreads, maintaining control over incremental NPA generations, improving CASA proportion and, improvement in fee based income. 

Shares of the company gained Rs 46, or 9.75%, to trade at Rs 518. The total volume of shares traded was 28,249 at the BSE (3.29 p.m., Tuesday).