Moody’s Investors Service on Tuesday affirmed the long-term local and foreign currency deposit ratings of State Bank of India (SBI) at ‘Baa3’ while downgrading SBI’s BCA to ‘ba2’ from ‘ba1’.

Moody’s view that the bank’s asset quality and profitability will deteriorate on account of concern on asset quality due to moratorium therefore the rating agency downgraded SBI’s Baseline Credit Assessment (BCA).

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It is to be noted, ‘Baa’ rating indicates moderate credit risk and ‘ba’ indicates substantial credit risk.

“As a result, Moody’s has also downgraded SBI’s foreign currency preferred stock non-cumulative MTN (medium term note) program rating to (P)B2 from (P)B1, and the rating of the preferred stock non-cumulative (Basel III compliant Additional Tier 1 securities) bond issued out of its DIFC branch to B2(hyb) from B1(hyb),” the statement said.

The resultant weakening in internal capital generation will reverse improvements in the bank’s financial metrics achieved over the past two years, it added.

Moody’s has maintained SBI’s rating outlook, where applicable, as negative, in line with the outlook on India’s sovereign rating.

This rating action concludes the review initiated on SBI’s BCA, adjusted BCA, junior securities, and the junior securities of its London, Hong Kong, DIFC and Nassau branches initiated on 2 June 2020, it said.

The economic shock from the coronavirus pandemic will exacerbate an already material slowdown in India’s economic growth, weakening borrowers’ credit profiles and hurting Indian banks’ asset quality, Moody’s said.

Prolonged financial stress among rural households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of bank’s balance sheet over the past two years, it said.

Prior to the review for downgrade, Moody’s had expected that improvements to SBI’s asset quality and profitability would result in financial metrics in line with global peers with ‘ba1’ BCAs.

SBI’s asset quality improved in the quarter ended June 2020, with its gross non-performing loan ratio declining to 5.4 per cent from 7.5 per cent a year ago.

However, Moody’s said, the ratio is potentially understated because it does not include loans on which the bank has granted payment deferrals.

As of June 2020, it said, about 9.5 per cent of SBI’s loans were under a repayment moratorium until the end of August 2020.

After the loan deferment period ends, the RBI has permitted Indian banks to restructure loans to borrowers whose earnings and businesses have been impacted by the pandemic.

In line with the trend for other Indian peers, Moody’s expects SBI to restructure loans.

However, it said, uncertainty around the length and depth of India’s economic slowdown makes it difficult to estimate what portion of restructured loans will eventually turn into non-performing loans.