Moody's Investors Service has assigned a Baa3 rating to the proposed USD benchmark senior unsecured notes to be issued by State Bank of India (SBI, Baa3 stable, D+ negative/ba1).
The proposed notes are issued through SBI's London branch and will be listed on the Singapore Stock Exchange. The issuance contains 2 tranches of which one tranche is expected to mature in 2019 and the other in 2024. The rating outlook is stable.
The rating is subject to receipt of final documentation, the terms and conditions of which are not expected to change in any material way from the draft documents reviewed by Moody's.
SBI's Baa3 senior unsecured rating is derived from its 1) standalone credit profile of D+/ba1, and 2) Moody's assessment of the likelihood of a very high level of support from the Indian government (Baa3 stable) in a stressed situation.
SBI's standalone credit profile reflects 1) its deteriorating asset quality over the last few years, including a rise in gross non-performing loans and restructured loans, 2) its low capital sustainability, demonstrated by moderate internal capital generation relative to credit growth, 3) the challenging operating environment which continues to pressure its asset quality, 4) the potential decline in profitability due to lower net interest margins and higher credit costs, and 5) its dominant domestic franchise, with a presence in every area of the financial sector, and strong international presence.
The bank's final Baa3 rating incorporates a one-notch uplift due to Moody's assumption of the bank's very high level of support from the Indian government in a stressed situation. The assumption of high support is based on a combination of: 1) its large size and critical role in India's payment system, representing around 18% of system loans and 16% of system deposits as of end-March 2013 on an unconsolidated basis, and its nationwide reach through 15,297 branches and 36,740 ATMs, and 2) the government's 58.6% stake in SBI as of 3 February 2014 and the government's recent capital injections.
What Could Change the Rating-Up
While an upgrade is unlikely because of the challenging economic outlook, the outlook on the financial strength rating could return to stable if the bank substantially increases profitability, improves asset quality, and increases Tier 1 capital through internal capital generation, rather than through the government's frequent capital injections.
What Could Change the Rating-Down
A continued deterioration in the combination of impaired loans, loan loss reserve coverage, and earnings could negatively affect the financial strength rating. In addition, the financial strength rating could be negatively affected if capitalization falls significantly below 8%. Any negative rating action in relation to the sovereign's rating or outlook could also affect the bank's deposit and senior unsecured debt ratings and their associated outlooks.
Shares of the bank gained Rs 7, or 0.35%, to trade at Rs 1,991.25. The total volume of shares traded was 0 at the BSE (9.07 a.m., Thursday).
