06
Oct
11

SBI rating downgrade and opportunities..

SBI was downgraded on Tuesday by Moody’s over capital adequacy and deteriorating asset quality. More than poor SBI, credit for this downgrade can be claimed by congress intellectuals at centre. Government has been dilly-dallying over capital infusion for past several months. Being largest shareholder at 59% of country’s largest lender, government will have to fork out its share of required capital. In budget speech, our FM had said that all Public Sector Banks (PSB) will be recapitalized by Rs. 6000 crore. SBI alone would require more amount than that. But one thing to note is that it is not composite rating downgrade, rather it is downgrade of a segment of the bank’s debt instrument that is the perpetual tier- I bond.

Finance Ministry officials have been fuming over the downgrade (http://articles.timesofindia.indiatimes.com/2011-10-05/india-business/30246586_1_sovereign-rating-state-bank-sbi). Some of the things pointed by them makes a lot of sense and you can not avoid, but pointing out rating agencies of bias. Most of the western countries take AAA credit rating as their birth right. Despite having poor fundamental than lot of emerging countries, European Nations continue to enjoy higher credit rating. But in SBI case, it has to be pointed out that its fundamental has worsened over past few quarters. NPA’s have increased and if capital infusion does not happen soon, it will impact the growth prospects of SBI in FY13.

Should you invest on the basis of company ratings ? I don’t think so and rating never tells you about future performance of the company. SBI share price corrected sharply post this rating downgrade. Options data of SBI tells you that even 1300-1400 puts are open.  It also tells you the kind of panic and fear of capitulation which is prevailing in market. For me, it is an opportunity. IV’s are at high and I have sold some lower level puts. Obviously one has to be careful while writing options in current market scenario.

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