"The resultant haircut on SBI's assets will likely show a substantial impact," says Alka Anbarasu, a Moody's Vice President, and Senior Analyst. "Our scenario analysis concludes that SBI can absorb haircuts of up to 50%-55%, while maintaining a common equity Tier 1 ratio of above 9.5% at the end of March 2019."
Such a common equity Tier 1 ratio would give the bank some buffer above the minimum regulatory requirement of 8.6% by March 2019.
"This scenario also implies that a haircut exceeding 50%-55% will put pressure on SBI to once again seek external capital to uphold its capital position," adds Anbarasu.
The scenario analysis assumes about 35%-40% of the bank's NPLs are resolved under the various resolution processes in the next two financial years.
Moody's conclusions are contained in its just-released report titled "State Bank of India: Coming NPL resolution holds key to profit and capital performance," and is authored by Anbarasu.
Moody's report says that SBI is exposed to swings in its credit costs (loan-loss provisions), as it continues to provide for a large stock of problem assets and newly recognized NPLs.
And, the substantial increase in SBI's NPLs after the merger with its associate banks, uneven adjustments of the economy to recent financial disruptions, and current regulatory efforts to resolve problem accounts, will result in negative pressure on the bank's credit costs.
Moody's analysis suggests that a 50 basis points (bps) change in SBI's credit costs as a percentage of gross loans will have a 30bps impact on its return on assets (ROA). On an annualized basis, the bank reported credit costs of 2.6% of gross loans and an ROA of 0.4% in the quarter ended June 2017.
Moody's also points out that the bank's capitalization has improved — after a recent capital raising exercise — and the bank still owns a majority stake in its life insurance subsidiary, which represents a potential source of capital, if needed.
The bank has also slowed its annual loan growth to 6%-8% compared with average yearly growth of about 20% on a standalone basis between 2008 and 2013; a situation which has reduced the strain on capitalization.
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