SBI profitability faces pressure, says Moody’s

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MUMBAI: Moody’s Investors Service has said that State Bank of India’s (SBI’s) profitability could face lingering pressure as it spends the next six-eight quarters rebuilding its balance sheet buffers.

ICICI Bank also faces risks due to its large exposure to corporates, but the private bank has seen significant improvement in its core operating profitability, helping it absorb higher level of bad debts.

SBI is also showing a stabilization of its underlying asset quality, and we believe that recent developments provide further confirmation that it has moved past the worst of its latest asset cycle,” says Alka Anbarasu, a Moody’s VP and senior analyst. According to Anbarasu, SBI’s bad loan accretion has slowed and Moody’s sees this development as a sign that, barring new adverse shocks, the bank’s delinquencies in this cycle have peaked.

Another Moody’s VP, Srikanth Vadlamani, said that ICICI Bank’s capital buffer was better. “By contrast, ICICI’s asset quality has deteriorated over the last few quarters, and the bank’s corporate loans will remain under pressure, because some of its corporate customers show weak debt servicing metrics,” he said.

 On the issue of loss-absorbing buffers, Moody’s says that such buffers for SBI are weak, and that SBI’s profitability will remain under pressure, as the bank seeks to rebuild its buffers. Nevertheless, Moody’s expects that SBI’s strong core earnings capacity will limit downside risks for profitability, even if credit costs were to increase.
 By contrast, ICICI demonstrates significant buffers to withstand a meaningful deterioration in its asset quality, Moody’s said. ICICI Bank’s increase in its core profitability was driven by structural improvement in its funding profile, as well as higher net interest margins and better cost-to-income ratios.
 As the largest bank in India by assets and deposits, SBI accounted for around 17% of system loans and 16% of system deposits as of end-June 2015. As of the same date, ICICI accounted for 6% of system loans and 4% of system deposits.

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