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Instrument Amount Rating Action In Rs. Crore (August 2016) Tier II Bonds Programme-Basel-III 13,000.00 [ICRA]AAA(hyb) (stable); reaffirmed Tier II Bonds Programme 675.00 [ICRA]AAA (stable); reaffirmed Certificates of Deposit Programme 3,500.00 [ICRA]A1+; reaffirmed Term Deposits Programme - MAAA (stable); reaffirmed

ICRA has reaffirmed the ratings of [ICRA]AAA (pronounced ICRA triple A) with a stable outlook on the Rs. 675 crore Tier II Bonds Programme, MAAA (pronounced M triple A) with a stable outlook on the Term Deposits Programme and [ICRA]A1+ (pronounced ICRA A one ) on the Rs. 3,500 crore Certificates of Deposit Programme of State (SBI)1 . ICRA has also reaffirmed the [ICRA]AAA(hyb) (pronounced ICRA triple A hybrid) rating with a stable outlook on the Basel III compliant Tier II Bonds Programme of Rs. 13,000 crore of SBI. The letters “hyb” in parenthesis suffixed to the rating symbol stand for “hybrid”, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features; such features may translate into higher levels of rating transition and loss-severity vis-à-vis conventional debt instruments. The rated Basel III compliant Tier II bonds are expected to absorb losses once the ‘point of non-viability’ (PONV) trigger is invoked.

The ratings continue to factor in SBI’s majority sovereign ownership (60.18% equity shares held by Government of India (GoI) as on March 31, 2016), its dominant position in the Indian banking industry, its systemic importance, healthy deposit base and comfortable liquidity profile.

ICRA takes note of the significant increase in the bank’s gross NPAs, from 4.15% as on September 30, 2015 to 6.50% as on March 31, 2016. The bank’s fresh NPA generation increased significantly to Rs 51,005 crore (7.80%) in H2FY2016 (~Rs 23,800 crore on account of the RBI’s Asset Quality Review) as compared to Rs. 13,194 crore (2.07%) in H1FY2016.

As a result of the sharp increase in gross NPAs, the attendant pressures on income and elevated provisioning requirements led to a sharp decline in net profitability with the PAT in relation to ATA falling to 0.46% in FY2016 (0.68% in FY2015). Notwithstanding the current deterioration, SBI’s annual operating profits (pre-provisioning) in relation to Net NPA remain at ~78% providing adequate cushion to absorb potential losses. Further, SBI’s tier I at 9.92%, and the large unrealized gains on fixed assets and other investments provide cushion to absorb unexpected losses as well as to give visibility of the availability of capital to support the planned 12-14% growth over the medium term. Expectation of strong support from the GoI, given SBI’s systemic importance and it being the largest public sector bank is incorporated into the rating.

The strength of SBI’s franchise is reflected in its competitive cost of funds, leadership position in the key retail and corporate loan markets and its high fee based income. SBI has a market share of 17.6% in deposits and 16.3% in credit outstanding of the Indian banking system as on March 31, 2016. It has maintained the share of CASA deposits at around 44% as on March 31, 2016 resulting in competitive cost of funds and its strong Govt relationships ensured healthy fee based income at 0.77% of ATA in FY2016.

While a significant portion of the stressed assets were recognised as non-performing in H2FY2016, fresh NPA generation is likely remain at elevated levels in FY2017 as well, though lower than FY2016. A large part of fresh slippages are likely to be from restructured advances and stressed assets of 2.08% (Rs. 31,300 crore, as disclosed by the management) of which 70% is expected to slip in FY2017. Hence, the bank’s asset quality profile is likely to remain under pressure in FY2017.

As on March 31, 2016, the bank reported Basel III capital adequacy of 13.12% (Tier I of 9.92% and CET1 of 9.81%). While the capitalisation level is comfortable against the current regulatory minimum requirements, the

1 For complete rating scale and definitions, please refer to ICRA’s website (www.icra.in) or other ICRA rating publications

bank would need to raise significant fresh Tier I capital over the next 3 years to meet the increasing regulatory minimum capital requirements as well as to fund growth.

ICRA estimates that SBI would need to raise Tier I capital of around Rs 50,000-70,000 crore (~30-40% of its current market cap2) during FY2017-19, depending on internal capital generation and growth in risk weighted assets during the period. In July 2016, the GoI announced a capital infusion of Rs. 7,575 crore in SBI. ICRA also notes that SBI’s ability to raise capital from non-government sources is superior to that of other public sector , given its better share price valuation. There is also headroom available for dilution in GoI holding from the current level of 60.18% (as on March 31, 2016) to the minimum of 52% prescribed by the Ministry of Finance.

The bank’s profitability deteriorated in FY2016 on account of high interest reversals following the high slippages and increased credit provisioning in H2FY2016 (credit provisions as % of ATA of 1.9% in H2FY16 vs. 0.75 % in H1FY2016 and 0.91% in FY2015). The bank reported a PAT/ATA of 0.46% in FY2016 vs. 0.68% in FY2015. ICRA expects the credit costs to remain high going forward, on account of the elevated level of slippages continuing, ageing of NPAs and the management’s intent to increase the provision coverage ratio. As a result, SBI’s profitability profile is expected to remain subdued in FY2017. Any significant improvement in profitability would be linked to SBI’s ability to recover from its weak assets3.

In June 2016, the Union Cabinet gave an in-principle approval for merger of five associate banks with SBI; the merger is expected to be completed by March 2017. While ICRA notes that in the short run, there are likely to be issues regarding post employment liabilities and alignment of asset classification with associate banks, it also takes cognisance of the benefits such as cost rationalization and improved branch presence that are likely to accrue in the medium to long term.

Bank Profile The origin of the goes back to the first decade of the 19th century with the establishment of the in 1806 (redesigned as the Bank of Bengal in 1809), the (1840) and the Bank of Madras (1843). These three banks amalgamated as the in 1921. In 1951, when the country’s first 5-year plan was launched, the Imperial Bank of India was integrated with other state-owned and state-associate banks. An Act was accordingly passed in the Parliament in May 1955 and the State Bank of India (SBI) was constituted in July 1955. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling SBI to take over eight former state associated banks as its subsidiaries (later named associates).

SBI is the largest bank in the country and is 60.18% owned by the GoI. As on March 31, 2016, SBI had five associate banks and the consolidated asset base of SBI and its associates was over Rs. 28 lakh-crore. As on March 31, 2016, SBI had 16,784 branches in India and 198 overseas offices and branches spread over 36 countries with 100% of its business covered by a core banking solution.

For FY2016, SBI reported profit after tax (PAT) of Rs. 9,951 crore on an asset base of Rs.22,59,063 crore as compared to a PAT of Rs. 13,102 crore on an asset base of Rs. 20,48,080 crore for the previous financial year. As on March 31, 2016, the bank reported capital adequacy of 13.12% (Tier I of 9.92%) and gross NPAs of 6.50%. August 2016 For further details please contact: Analyst Contacts: Mr. Karthik Srinivasan (Tel No +91 22 6114 3444) [email protected]

Relationship Contacts: Mr. L. Shivakumar, (Tel. No. +91 22 6114 3406) [email protected]

2 Including capital needed for associate banks and additional capital requirement of 0.6% being a domestic systemic important bank (D-SIB). Assuming internal capital generation at 7-8% and growth in risk weighted assets at 13%- 14%. Also assuming a 1% buffer over and above minimum regulatory core capital 3 SBI reported gross NPA% of 6.50% and standard restructured advances of 2.59% as on March 31, 2016

© Copyright, 2016, ICRA Limited. All Rights Reserved Contents may be used freely with due acknowledgement to ICRA ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.

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