Fitch Affirms SBI, Bank Of Baroda At 'BBB-'; Outlook 'Stable'

For SBI, Fitch has affirmed the viability rating at 'bb'. It has also revised the operating environment score to 'bb+' from 'bb', indicative of several structural improvements since the onset of the Covid-19 pandemic.

It also reflects the bank's ability to generate business consistently, while managing risk better and its dominant market share as India's largest lender.

The agency, however, revised the outlook on SBI's asset quality score of 'bb-' to 'positive', from 'stable'. This is due to the expectation of four-year average impaired loans ratio to improve in near-term. In FY23, the lender's impaired loan ratio fell to 2.8%, from 4.0% in FY22.

SBI's appetite for retail lending also remains high, according to Fitch. "The need to optimise capital utilisation is a constraint, while the pace of growth in certain pockets could test SBI's risk controls under less-benign operating conditions," it said.

However, there are some factors that could lead to a negative rating as well, as per Fitch. "Fitch views SBI's VR—which reflects a moderate degree of financial strength—as reasonably stable in the near term, but it could be downgraded if there is significant deterioration in the OE, or if a heightened risk profile were to become a more binding constraint on the bank's moderate capital buffers."

The agency also flagged SBI's governance and considered it to be "less developed". This was mainly reflective from significant lending to high-risk borrowers, which has led to above-average levels of impaired loans and credit loss, as per Fitch.

SBI's ESG relevance score for financial transparency was also revised to the sector default score of '3', from '4'. This was an indication that the risks from Covid-affected loans have receded.

"This is because we believe that a large proportion of those stressed loans may actually be covered by government guarantee, which materially minimises the risk of losses from this portfolio," Fitch said.