The global rating agency expressed concerns about the "poor asset quality" of the bank and said SBI's capital adequacy ratio -- although adequate at 14.58 per cent -- is not strictly in accordance with the Bank of International Settlement Standards.

"The 38 per cent increase in after-tax profit recorded by the bank during 1997-98 was largely due to a non-recurring write-back of past provisions made on its securities portfolio. While SBI's after tax return on average assets (ROA) of 1.11 per cent was a significant improvement over the 0.90 per cent recorded in the previous year, underlying profitability actually weakened in 1997-98. Adjusting for this abnormal write-back, ROA was only about 0.53 per cent," an S&P release said.

"Given its size and dominant position within the Indian banking sector, S&P believes thatthe government of India would support SBI if the need arose," the release added.

S&P said that though the published asset quality measures of the bank have improved and are comparable to its domestic peers, SBI's non-performing assets-to-total loans ratio of 14 per cent is still high by international standards. "The bank's credit profile is moderated by its poor asset quality, weakening profitability and its deteriorating operating environment which is expected to result in rising impaired asset levels," the agency said.

According to S&P, slower economic growth, restructuring and consolidation in key industrial sectors will result in a more difficult operating environment over the near term. "Although the bank has made provisions for its impaired loans in accordance with domestic regulatory requirements and has also begun to make general provisions, asset quality is expected to remain one of the key sensitives in SBI's rating," S&P said.

While on the basis of its published equity-to-assets ratio, SBI's5.35 per cent capitalisation is average by international standards, it is likely to be leveraged in the medium term as the bank expands into infrastructure financing and investment banking activities, it said.

Credit growth still negative

The State Bank of India's credit offtake in fiscal 1999 is still below the March 31 level. According to SBI insiders, the bank's domestic credit portfolio marginally crossed the March level in the first week of November, but subsequently came down. "The credit growth is still negative," sources said.

The negative credit growth is significant against the backdrop of a Rs 9,509-crore non-food credit growth in the banking industry as on November 6.

In the first half of 1998-99 (April-September), SBI recorded a 2.9 per cent negative credit growth and yet it could clock 21.71 per cent in its net profit on the back of volume-driven business.

Supported by volume growth of 16.08 per cent in the average advances level, the income from advances registered a 9.07 percent growth in the first half. This is despite the fall in average yield on advances in India to 11.76 per cent from 12.51 per cent for the same period in the previous year.

However, taken separately, advances for the second quarter reported a decline. The bank's net global advances at Rs 71,391 crore as on the last Friday of September 1998 declined by 3.8 per cent over the figure at end March 1998.

Global deposits grew to Rs 142,556 crore, up by 8.7 per cent from the figure on end March 1998. The domestic deposits grew to Rs 1,35,000 crore, up by 9.3 per cent from the end March figure. The growth in deposits has been continuing unabated.

Former SBI chairman MS Verma had earlier said the credit offtake would improve in the second half and SBI's target of 16 per cent growth in credit would be easily met.

The bank is pushing infrastructure advances in a big way. In the face of industrial slowdown, SBI is also targeting housing and consumer finance sectors to raise its creditofftake.INSIGHT
Report far from surprising

There is very little by way of an extraordinary disclosure from S&P regarding the problems with SBI or, in the Indian banking sector for that matter. Stock market and other analysts have known that the standards of evaluation of both non-performing assets as well as provision of risk adjusted capital are below international norms. That the earnings capacity of the bank has been eroded due to tighter spreads and the reliance on profit on sale of investments in the current year are well known. Indian bank stocks and even SBI have accordingly been appropriately re-rated by the market. The SBI scrip has been in a decline since November last year and has been underperforming at the Sensex since.