Moody's puts debt ratings of SBI and 10 others under scanner

Rating agency Moody’s on Monday placed subordinated debt ratings of 11 banks, including the country’s premier lender State Bank of India (SBI) under review because of the updating of its methodology.

In a statement issued, Moody’s said the latest action was not driven by a change of view on the intrinsic financial strength of the banks and related debt securities but only follows change in its assumptions about the systemic support to sub-debt holders. “The review takes place in the context of a methodology update that has changed the way Moody’s looks at the probability of support, which has led to several sub-debt ratings in multiple banking systems being reviewed simultaneously,” it said.

Accordingly, apart from SBI, 10 other banks placed under review in the wake of its methodology update envisage ICICI Bank, Axis Bank, HDFC Bank, Union Bank of India, Syndicate Bank, Canara Bank, Indian Overseas Bank, Bank of India, Bank of Baroda and IDBI Bank. 

In fact, the rating agency has put 41 banking groups across Asia-Pacific, including India for review for downgrade, while these groups currently benefit from a rating uplift due to systemic support. The revised methodology now assumes (as a starting point), that no support would be extended to sub-debt holders, except where particular circumstances justify, the rating agency said.

Previously, it had assumed that sub-debt would indirectly benefit from the support provided to banks to protect deposits and senior debt.

Moody’s also noted that its preliminary conclusion points to reasonable doubt over whether the status quo would survive test cases where governments provide significant financial support to banks, especially in a systemic crisis that puts stress on the government’s own balance sheet. It expects to conclude its review within the next three months.

However, the market did not react badly to the report and the Bankex was down just 50 bps against the broader market which was down nearly double the Bankex.