Bank index is biggest loser after Moody's SBI downgrade

The BSE Bankex was the biggest sectoral loser as it declined by a sharp 3.09 percent following the downgrade of State Bank Of India (SBI) by rating agency Moody’s. The standalone rating of SBI, India’s largest public sector bank, was dowgraded to D+ from C-. The stock plunged to a 22-month low of Rs 1,751.35 before it closed 4.09 percent lower at Rs 1,786.7.

“The rating action is precipitated on the issue of lower-than-adequate capital to absorb the current higher-than-normal delinquencies. We believe neither of these barometers is likely to change for the better for SBI in the near term. The rating downgrade, effectively, raises the cost of capital for SBI (and may even do so for other state-owned banks that are usually pegged to SBI),” said Ambit Capital post the down grade of the bank.

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Other bank stocks were also mauled by investors as fears about the asset quality of other banks heightened. Yes Bank , ICICI Bank, Axis Bank, IDBI and IndusInd Bank slumped 3-5 percent.

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In an interview with CNBC-TV18, Vaibhav Agrawal, banking analyst at Angel Broking, said: “We have concerns that SBI being the largest bank its capital adequacy is the lowest amongst Indian banks, and that is primarily the reason why Moody’s has downgraded SBI”.

In recent weeks, a spate of research reports have warned about the deteriorating quality of banking assets, especially among state-run banks.

The most recent report was from Centrum Broking, which noted: “Besides the impact on credit demand, the downward revision in our GDP growth estimate also implies increased challenges on asset quality front for banks and NBFCs. Given the macro challenges (slowing growth and high inflation), we believe that deterioration in asset quality (especially small and medium enterprises, export- oriented sectors and infrastructure) is likely to be higher than expected earlier. In turn, the macro environment will keep the slippage rate and credit costs higher during the year ending March 2012.”

The brokerage added that worsening credit quality had pressurised earnings of banks, especially state-run banks, in the past two quarters.