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Rating Action:

Moody's affirms State Bank of India ratings; assigns Counterparty Risk Assessment

22 Jun 2015

Singapore, June 22, 2015 -- Moody's Investors Service has affirmed State Bank of India's (SBI) local and foreign currency deposit ratings of Baa3/P-3. Moody's has also affirmed the (P)Baa3 ratings on the bank's and its branches' senior unsecured medium term note (MTN) program, and the Baa3 rating on the senior unsecured debt issued from its London branch. The outlook of SBI and its branches is positive.

In addition, Moody's has affirmed SBI's baseline credit assessment (BCA) and adjusted BCA of ba1.

Furthermore, Moody's has assigned a Counterparty Risk Assessment (CR Assessment) of Baa3/P-3 to SBI and its branches -- in line with Moody's new bank rating methodology.

Moody's has also affirmed the (P)Ba1 ratings on the banks' and its branches' foreign currency subordinated MTN program, and the (P)Ba2 ratings on the banks' and its branches' foreign currency junior subordinate MTN program. In the case of SBI, Nassau Branch, Moody's has affirmed the B1(hyb) preferred stock (non-cumulative) ratings, and withdrawn the negative ratings outlook. All other short-term program ratings of the bank have been affirmed at (P) P-3.

Moody's has withdrawn the outlooks on all junior instrument ratings for its own business reasons. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term deposit and issuer/senior unsecured debt ratings. For more information on the new bank rating methodology, please see Moody's press release at http://www.moodys.com/viewresearchdoc.aspx?docid=PR_321005.

The full list of affected ratings is provided at the end of the press release.

RATINGS RATIONALE

AFFIRMATION OF THE SBI's LONG-TERM RATINGS

Moody's new bank rating methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the global financial crisis, and the fundamental shift in the banking industry and its regulation after this event.

In terms of the application of Moody's new bank rating methodology to SBI, Moody's rating actions reflect the following considerations: (1) Moody's view of India's "moderate" macro profile; (2) the bank's standalone financial profile; and (3) Moody's "very high" government support assumptions for SBI.

1) India's "moderate" macro profile

Primarily operating locally, SBI's Macro Profile is aligned with that of the sovereign at Moderate. India has grown faster than similarly rated peers over the last decade due to favorable demographics, economic diversity, as well as high savings and investment rates. These structural advantages, supported by relatively benign global commodity prices and liquidity conditions, will keep India's growth higher than that of its peers over the rating horizon. However, recurrent inflationary pressures, occasional balance of payments pressures, and an uncertain regulatory environment have contributed to periods of volatility in growth, and have exposed India to external and financial shocks, constraining its credit profile.

Credit conditions in India reflect a rapid increase in corporate leverage, partially offsetting a low level of banking penetration relative to the overall economy. The corporate sector remains burdened by the effects of high growth in corporate lending. While growth in corporate lending has recently slowed, many leveraged corporate borrowers have seen earnings decline, relative to debt servicing requirements, due to weak macroeconomic growth.

Funding remains a credit strength for Indian banks. Although loan growth in India will continue to be relatively rapid, the country's high household savings rate -- which has averaged 23% of GDP over the past decade and a half -- means that retail deposits also reliably show strong growth.

2) Standalone financial profile of SBI

SBI's BCA of ba1 recognizes its dominance as the largest commercial bank in India by assets and deposits. Nevertheless, the bank's asset quality has deteriorated in recent years due to exposures in the corporate- and infrastructure segments. Such asset deterioration includes a rise in impaired loans (gross non-performing loans (NPLs) and standard restructured loans), and a smaller cushion to absorb losses, as seen by SBI's low provision coverage and lower Tier 1 capital ratio relative to other large banks in emerging markets. SBI is unlikely to manage down its NPLs in next 12-18 months, given the continued challenges in India's corporate sector.

Despite these credit challenges, amongst Indian public sector banks, we expect SBI is best placed, to capture the benefits of the improving macro-economic profile of India as well as the initiative undertaken by the government to ease pressure on corporate asset quality.

The bank's Tier 1 capital ratio under transitional Basel III rules was above regulatory requirements at 9.6% in March 2015. However, SBI's business model entails frequent capital injections from the Government of India (Baa3 positive) because its internal capital generation is lower than its credit growth.

3) Very high government support assumptions for SBI

Moody's assessment of the very high probability of support to SBI in the event of financial distress considers the bank's importance to the domestic banking industry, and its close relationship with the government, which has a 59.2% stake in the bank. On the back of this assessment, the deposit rating of Baa3 receives a one-notch uplift from the BCA of ba1.

ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS

Moody's has assigned long-term and short-term CR Assessments of Baa3(cr)/P-3(cr) to SBI and its branches.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they: (1) consider only the risk of default rather than expected loss; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments.

A CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

CR Assessments take into account the issuer's standalone strength, as well as the likelihood of affiliate and government support in the event of need, and reflect the anticipated seniority of these obligations in the liabilities hierarchy.

CR Assessments also incorporate other steps authorities can take to preserve the key operations of a bank should it enter a resolution.

For SBI, the CR Assessment is positioned one notch above its Adjusted BCA. The CR Assessment does not benefit from any systemic support as it is already at the same level as the Baa3 sovereign rating of India.

WHAT COULD CHANGE THE RATINGS -- UP

SBI's senior unsecured debt and deposit ratings could be upgraded if the India sovereign rating (Baa3, positive) is upgraded.

WHAT COULD CHANGE THE RATINGS -- DOWN

Downward pressure on SBI's BCA could develop from a continued deterioration in impaired loans. A material decline in the combination of profits, loan-loss reserves and capital, relative to impaired assets, would also put pressure on its ratings.

Additionally, any indications that support from the Government of India (Baa3 positive) has diminished or that additional capital requirements may arise beyond the government's budgeted amount could put the bank's deposit and senior unsecured debt ratings under pressure.

Any downward changes in the sovereign ceilings could also affect the bank's deposit and senior unsecured debt ratings.

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Taking into account today's announcement, SBI's ratings are as follows:

State Bank of India

Local currency deposit rating affirmed at Baa3/P-3; outlook on long-term rating is positive

Foreign currency deposit rating affirmed at Baa3/P-3; outlook on long-term rating is positive

Other short-term program rating affirmed at (P)P-3

Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3

Foreign currency subordinated MTN program rating affirmed at (P)Ba1

Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2

Pref. stock (non-cumulative) rating affirmed at B1(hyb)

Baseline credit assessment (BCA) and Adjusted BCA affirmed at ba1

CR Assessment of Baa3(cr)/P-3(cr)

State Bank of India, Hong Kong Branch

Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3

Foreign currency subordinated MTN program rating affirmed at (P)Ba1

Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2

Other short-term program rating affirmed at (P)P-3

CR Assessment of Baa3(cr)/P-3(cr)

State Bank of India, London Branch

Foreign currency senior unsecured debt rating affirmed at Baa3; outlook positive

Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3

Foreign currency subordinated MTN program rating affirmed at (P)Ba1

Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2

Other short-term program rating affirmed at (P)P-3

CR Assessment of Baa3(cr)/P-3(cr)

State Bank of India, Nassau Branch

Foreign currency senior unsecured MTN program rating affirmed at (P)Baa3

Foreign currency subordinated MTN program rating affirmed at (P)Ba1

Foreign currency junior subordinate MTN program rating affirmed at (P)Ba2

Pref. stock (non-cumulative) rating affirmed at B1(hyb)

Other short-term program rating affirmed at (P)P-3

CR Assessment of Baa3(cr)/P-3(cr)

State Bank of India, headquartered in Mumbai, reported total consolidated assets of INR27,001.1 billion ($327 billion) as of 31 March 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alka Anbarasu
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms State Bank of India ratings; assigns Counterparty Risk Assessment
No Related Data.
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