No need to jump the gun after Moody's downgrade of SBI

The power of rating agencies, widely discredited as they may be, was once again on display when international rating agency, Moody’s downgraded State Bank of India’s ( SBI) rating on Tuesday, citing concerns over capital and deterioration in asset quality.

In a skittish market, the downgrade — from C- to D+ on financial strength and from Ba2 to Ba3 on hybrid debt rating — saw SBI’s share price fall to a 52-week low before recovering some of the losses. The BSE Bankex and wider market Sensex fell in unison since SBI is seen as a proxy for both the banking sector and, along with other banks, the wider economy.

Moody’s concerns, on capital and asset quality, are not entirely without basis. At 7.6%, the bank’s tier I capital, comprising equity and reserves, is below the eight percent mandated by the government for public sector banks.

Meanwhile, the pressure on the bank to continue lending during the downturn following the collapse of Lehman Bros, combined with the hike in interest rates and recent slowdown, is bound to see a worsening of its loan portfolio. Hence, there is no doubt the bank’s financial position isn’t as healthy as it was, say, two years ago.

But to conclude that there is any cause for alarm is to jump the gun. For one, the bank is still majority-owned by the government. Technically, thus, the bank is as sound as the Government of India and as such is unlikely to face any difficulty in raising fresh capital.

One could argue the government has not shown much alacrity in pumping in fresh capital so far. Indeed, the bank’s request for a rights issue has been pending with the authorities for long precisely because the government was both loath to let its share fall below 51% and was unwilling to chip in fresh capital.

So, the downgrade might compel the government to move faster on that, Moody’s action may even be a blessing in disguise for the bank. A mixed blessing, no doubt, since the downgrade will push up costs for the bank if it needs to raise capital abroad. But overseas capital for a bank like SBI is a relatively insignificant part of its overall capital. Thus, on balance, the downgrade must be seen as a note of caution rather than as an alarm bell.