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Announcement:

Moody's: State Bank of India's relatively weak full-year results do not impact ratings

Global Credit Research - 18 May 2010

Limassol, May 18, 2010 -- Moody's Investors Service says that the relatively flat net profits reported by State Bank of India ("SBI") as a result of the bank's higher costs and loan loss provisions will not have an impact on the bank's ratings at this point of time.

Specifically, Moody's notes that State Bank of India (SBI) reported relatively flat net profit of INR91.7 billion (US$2 billion) for the year ending March 2010 (FY2010), compared to INR91.2 billion in FY2009. This represents a marginal increase of 0.49%, despite the 15.1% growth in total operating income for the year. The disappointing bottom-line results are mainly the result of the bank's significantly higher cost base as well as the increase in loan loss provisions. Moody's cautions that a possible continuation of this trend over the short to medium term would exert some pressure on the bank's currently stable outlook on its stand-alone ratings of "C-" bank financial strength rating (BFSR), which maps to a baseline credit assessment (BCA) of Baa2.

SBI's net interest income grew by 13.4% on the back of a moderate increase of 16.9% in loans and 8.4% in deposits as the bank shed high-cost bulk deposits from its balance sheet and was able to grow its low-cost (CASA) deposits by 26.8% during FY2010. As a result, the bank's loan-to-deposit ratio increased significantly to 73.6% in FY2010 from 66.6% in FY2009, although its net interest margin (NIM) declined to 2.66% in FY2010 from 2.93% in FY2009 and 3.07% in FY2008.

Nevertheless, Moody's notes that the cumulative NIM increased on a quarterly basis as it went up in the fourth quarter of FY2010 to 2.66% from 2.56% in the third quarter of FY2010, which suggests that the bank was able to reverse the declining trend. The rating agency expects this to improve further going forward, in line with the management's intention.

The bank's market share in gross loans increased to 16.3% from 16% the year before, while total market share in deposits declined to 16.3% from 17.7% in FY2009 as the bank refrained from rolling-over maturing and relatively expensive wholesale deposits, thereby losing some ground in the deposits market.

A positive contributor to the bank's earnings that is highly associated with loan volumes was the increase of fee income by 26.6%. Fees and commissions now comprise around 25% of SBI's total operating income compared to 22.7% the year before, thus providing an extra degree of revenue diversification for the bank. Other non-interest income also increased by 5%, despite the 17.6% decline in profits on the sale of investments as interest rates in India started to inch up during FY2010.

Moody's observes that the significant increase in SBI's cost base dented the bank's revenues. The hiring of nearly 27,000 new employees during FY2010 has meant an increase of 30.9% in total staff expenses, which also included a material amount for wage revisions pertaining to previous years, as well as additional contributions by the bank for pension. Moreover, other operating expenses increased by 28.2% as the bank continued its expansion by opening 1,049 new branches and installing 7,788 new ATMs.

As a result, the bank's cost-to-income ratio increased to 52.6% in FY2010 from 46.6% in FY2009. Moody's says that SBI's main challenge now is to extract value and additional earnings from this heavy investment in both human resources and infrastructure, which, according to management, has laid the foundation for future growth. However, Moody's recognises that the level of predictability of pension-related expenses is relatively low and that the bank aims to focus on cost containment in FY2011. One factor that alleviates some concerns regarding SBI's cost base is that new employees will be placed under the "defined contribution expenses" and not the defined benefit scheme, thereby limiting the incremental jump in staff costs.

Loan loss provisions in FY2010 more than doubled with an increase of 108% eating into the bank's operating profit by 28%. The absolute level of gross non-performing loans (NPLs) increased by as much as 24.3%, although the gross NPLs ratio was only marginally higher at 3.05% from 2.86% in FY2009. Moody's also notes that the net NPLs ratio was contained at 1.72% from 1.79% the year before.

SBI's provisioning coverage ratio, including technically written-off accounts, rose to 59.2% in March 2010 from 57% in March 2009. According to Moody's, this means that the bank still has some ground to cover in order to comply with the regulator's (RBI) 70% requirement by September 2010. According to the management, the bank is currently in talks with RBI in order to obtain an extension of this deadline so as to avoid putting too much strain on its income through increased credit costs during FY2011. Moody's also views negatively the additional loan restructuring of INR38 billion during the fourth quarter of FY2010, thus bringing the total of restructured loans to INR268 billion (US$6 billion) comprising 4.2% of total loans as of March 2010.

Lastly, SBI's capital levels under Basel II remain comfortable at a capital adequacy ratio (CAR) of 13.4% at the end of March 2010, compared to 14.25% in March 2009, with a Tier 1 ratio of 9.45%. Although CAR was lower than it was the year before, Moody's still believes that the bank has sufficient core equity to grow its balance sheet at a reasonable pace, with loan growth expected to be around 21% during FY2011. However, over the medium to longer term, SBI will be in need of fresh capital funds with the bank's management looking to raise INR150-200 billion (US$3.3-4.4 billion) through a rights issue, although no specific timeframes have been put in place yet. Moody's says that such a development would alleviate any pressure on the bank's rating outlook.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Nondas Nicolaides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: State Bank of India's relatively weak full-year results do not impact ratings
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