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Informist, Friday, Mar. 28, 2025

--Fitch affirms State Bank of India at BBB-; outlook stable 
--Fitch affirms Canara Bank at BBB-; outlook stable 
--Fitch: Expect SBI to achieve 0.5% credit cost guidance 
--Fitch: SBI's profitability likely to normalise over next 2 years

NEW DELHI/MUMBAI – Fitch Ratings Friday affirmed the long-term issuer default ratings of State Bank of India and Canara Bank at "BBB-", with a "stable" outlook for both banks. SBI's rating reflects Fitch's view that the state-owned bank has the highest probability of extraordinary government support among Indian banks, if required, it said. "This takes into consideration SBI's market position as the country's largest bank, the state's 56.9% controlling ownership, and the bank's broader policy role than peers."

Canara Bank's rating is also reflective of a high probability of government support, Fitch said.

The credit ratings agency noted India's strong medium-term growth potential as the supporting environment for the growth of both banks. Projecting India's GDP growth at over 6% in 2024-25 (Apr-Mar) and FY26, Fitch said it will support Indian banks' ability remain profitable in the medium term.

SBI has better risk management than other state-owned banks, but influence of the government may weigh on its traditional business model and risk appetite, Fitch said. The government influence over state-owned banks may also weigh on Canara Bank's risk appetite, it added.

Fitch has revised the outlook on Canara Bank's asset quality to positive from stable on expectations of a further fall in impaired loan ratio. As at December end, Canara Bank's gross non-performing assets ratio declined to 3.34% from 3.73% a quarter ago and 4.39% a year ago.

Canara Bank's profitability is likely to have peaked, and Fitch expects its operating profit to risk-weighted assets ratio to fall 40 basis points by FY27. The bank's operating profit to risk-weighted assets ratio was steady at 3% in the Apr-Dec period, as reduced credit costs and higher non-interest income offset the impact of lower margins. However, Fitch does not expect this ratio to fall below 1.25%, the threshold to enter in Fitch's 'bb' category.

SBI's profitability is likely to normalise over the next two years due to pressure on net interest margin and rising credit costs, Fitch said. The bank's common equity Tier-I capital is expected to increase further by 25 basis points in FY25 after having risen to 11% in the Apr-Dec period. This is due to a reduction in regulatory risk weights on non-bank lender exposures, the ratings agency said.

On Feb. 25, the Reserve Bank of India restored the risk weights applicable on banks' exposure to non-bank lenders to the pre-November 2023 levels. On Nov. 16, 2023, the central bank had increased risk weights in certain loan segments including unsecured personal loans on robust credit growth. While the reversal of the 25-percentage-point hike in risk weights is effective Apr. 1, the central bank's move to reduce the risk weight to 100% from 125% for microfinance loans in the nature of consumer credit was effective immediately.

Canara Bank's common equity Tier-I ratio is expected to improve to about 12.5% by FY27 from 12% in Apr-Dec, the ratings agency said, adding that ratings of both the banks may take a hit in the case of a fall in the government's ability to support them.

Fitch sees governance at both the banks to be less developed due to a significant amount of loans to risk borrowers. At 1255 IST, shares of State Bank of India were at INR 771.35 on the National Stock Exchange, down 0.1% from Thursday. Shares of Canara Bank were down 0.4% at INR 89.33. End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Reported by Shubham Rana and Sourabh Kumar

Edited by Nishant Maher

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