TEXT-S&P summary: State Bank of India

Mon Dec 3, 2012 6:15am EST

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(The following statement was released by the rating agency)

Dec 03 -

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Summary analysis -- State Bank of India --------------------------- 03-Dec-2012

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CREDIT RATING: BBB-/Negative/A-3 Country: India

Primary SIC: Commercial banks,

nec

Mult. CUSIP6: 85628U

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Credit Rating History:

Local currency Foreign currency

30-Jan-2007 BBB-/A-3 BBB-/A-3

02-Feb-2005 BB+/B BB+/B

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Ratings Score Snapshot

Issuer Credit Rating BBB-/Negative/A-3

SACP bbb-

Anchor bbb-

Business Position Strong (+1)

Capital and Earnings Moderate (-1)

Risk Position Moderate (-1)

Funding and Liquidity Above Average

and Strong (+1)

Support 0

GRE Support 0

Group Support 0

Sovereign Support 0

Additional Factors 0

Outlook

The negative outlook reflects the outlook on the long-term sovereign rating on India. The ratings and outlook on SBI will move in tandem with the sovereign rating.

Standard & Poor's does not rate Indian banks above the sovereign rating because of the direct and indirect influence the sovereign in distress would have on a bank's operations, including its ability to service foreign currency obligations. Accordingly, we would lower the ratings on SBI if we downgrade the sovereign.

We may also lower the rating if the bank's SACP deteriorates substantially to 'bb'. SBI's SACP already reflects our expectation that the bank's performance will remain under pressure. Therefore, the possibility of a downgrade because of a weakening of the SACP is remote for the next two years at least.

The rating on SBI qualifies for an uplift for extraordinary government support, which is currently not incorporated into the rating.

Rationale

Standard & Poor's Ratings Services bases its issuer credit rating (ICR) on State Bank of India (SBI) on the bank's "strong" business position, "moderate" capital and earnings, "moderate" risk position, "above-average" funding, and "strong" liquidity, as our criteria define those terms. SBI's stand-alone credit profile (SACP) is 'bbb-'.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an ICR. Our anchor for a commercial bank operating only in India is 'bbb-'. SBI operates predominantly in India. The BICRA score is based on our evaluation of economic risk: In our view, India's economic resilience is constrained by its low-income though diverse and growing economy; and weak foreclosure laws, which accentuate credit risk despite moderate private sector debt. On the other hand, the risk of imbalances is low. Regarding our assessment of industry risk, Indian banks benefit from high levels of stable, core customer deposits. Banking regulations are in line with international standards and the regulatory track records are moderately successful, although disclosure standards are inadequate. Banks have moderate risk appetite and the industry is stable despite fragmentation, although directed lending and government-ownership create some market distortion.

SBI's undisputable leadership position in India's banking sector in terms of assets, loans, and deposits underpins its "strong" business position. Due to the bank's size, wide product suite, large client base, and extensive branch network, its business mix and revenue stream are a good reflection of the Indian economy. SBI has good diversification across products, geographies, and customer segments in India. It is one of the few Indian banks which have a sizable international presence (about 12% of the total consolidated loans are international loans). In our view, SBI's management and strategy appear to be adequate.

Our "moderate" assessment of SBI's capital and earnings reflects our projection that the bank's pre-diversification risk-adjusted capital (RAC) ratio will stay 5%-7% over the next 12-18 months despite a downward trend. The ratio was 6.2% as of March 31, 2012. SBI's profitability improved somewhat in the fiscal year ended March 31, 2012, after a lackluster performance in fiscal 2011. We expect the bank's credit costs to remain high and depress its profitability in fiscal 2013. The lower earning, in our view, will leave SBI's retained earnings barely sufficient to sustain its current asset growth leading to deterioration in its RAC ratio.

Our assessment of SBI's risk position as "moderate" reflects our expectation that the bank's asset quality will remain stressed and its credit costs will stay high in fiscals 2013 and 2014. SBI's gross nonperforming loan (NPL) ratio of 5.15% (on a stand-alone basis) as of Sept. 30, 2012, is the highest among the Indian banks that we rate. The restructured book (performing) was about 3.5% of the net loan book (on a stand-alone basis) as of Sept. 30, 2012. We expect SBI's asset quality to remain stressed, partly arising from continued slippages in its restructured book. On a stand-alone basis, the bank's mid-corporate and agriculture portfolios are particularly stressed. We attribute a part of the strain to challenges arising from managing a large organization. We also believe SBI, with its pan-India presence, does not concentrate only on economically prosperous regions and hence is more affected by an economic downturn. On the other hand, we acknowledge that the bank's loan book is well diversified in terms of sectors and customers, with low single name concentration.

Our assessment of SBI's "above-average" funding and "strong" liquidity reflects its superior customer deposit base and strong liquidity ratios. The bank's stable retail funding and highly "sticky" corporate deposit base have contributed to its good funding profile. Low-cost current and savings deposits are about 40% of customer deposits as of March 31, 2012, much higher than those of other public sector banks. Consumer and market confidence in SBI remain strong as demonstrated by the bank benefiting from the "flight to quality" during the recent global financial crisis. The bank has limited reliance on wholesale funding. Its liquidity ratios are strong compared with global peers'. Liquid assets--comprising cash and reserve balances and interbank and government investments--account for about 35% of total deposits.

We consider SBI a government-related entity and believe that there is a "very high" likelihood that the government of India (unsolicited ratings BBB-/Negative/A-3) would provide timely and sufficient extraordinary support in the event of the bank's financial distress. In accordance with our criteria for government-related entities, our view of a "very high" likelihood of extraordinary government support is based on our assessment of the following SBI's characteristics:

-- "Very important" role to the government. With SBI's 24% market share in customer deposits, we believe the bank plays a central role in fulfilling the government's policy of requiring banks in India to lend 40% of their advances toward "priority sectors" where the government wants to direct credit. Moreover, SBI is the sole agent for certain government transactions, including handling payment functions of the government.

-- "Very strong" link with the government. The Indian government has 61.58% stake in SBI. We believe the government's stake is strategic and long term. In accordance with the State Bank of India Act and other related legislation, the government must maintain a minimum equity stake of 51% in the bank. Moreover, the government influences the bank's strategic decision-making through its representation on the board and the appointment of the bank's chairman and managing director.

Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Bank Capital Methodology And Assumptions, Dec. 6, 2010

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