Fitch Ratings has affirmed the long-term issuer default ratings on nine Indian banks -- State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), ICICI Bank, Axis Bank, Bank of Baroda (New Zealand), Canara Bank, IDBI Bank and Indian Bank. The outlook has been termed stable.
The global ratings agency has also revised the Indian Banking sector outlook to “negative” from “stable” implying more downside risks for bank viability ratings (VRs) unless the risks of deteriorating asset quality and weak earnings are counterbalanced by sizeable capital infusions.
While the issuer default ratings of Canara Bank and IDBI Bank were affirmed, their VRs have been downgraded by one notch to ‘bb’ and ‘bb-’ respectively, “to reflect their weaker intrinsic risk profiles compared with higher-rated peers,” Fitch said.
“Asset quality (of banks) could deteriorate further over the next 12-18 months given the banks’ exposure to stressed sectors, such as infrastructure and iron and steel, and the difficult resolution process for stressed assets in the near term. Earnings for the sector are also likely to be weak due to muted loan growth and high credit costs,” it said.
Highlighting the historically weak capital positions of the Indian banks, Fitch said that the situation has worsened for most public-sector banks due to delayed recognition of problem assets and high loan-loss provisions, and will remain weak in the near term unless the government makes significant capital investment in the banks.
The government has envisaged a capital infusion plan of Rs 45,000 crore to public sector banks by fiscal year 2019. However, the government, or other related entities, are likely to have to inject more funds because Fitch estimates the banking system needs around $90 billion (about Rs 6 lakh crore) of capital, while many public-sector banks are likely to find it difficult to access new capital from other sources.
“Resolving both the asset quality and capital questions are important conditions for some banks to regain market access… The asset-quality and capital pressures on the system in the near term drive Fitch’s negative sector outlook, but the Reserve Bank of India’s reforms of the banking sector are likely to be positive over the long term” the agency added.