Fitch affirms ratings on 9 Indian banks; PNB's viability rating downgraded to 'bb'

03 Sep 2015 Evaluate

Rating agency Fitch Ratings has affirmed the ratings on nine Indian banks. The Long-Term Issuer Default Ratings (IDR) on State Bank of India, Bank of Baroda, Bank of Baroda (New Zealand), Punjab National Bank, Canara Bank, IDBI Bank, ICICI Bank and Axis Bank has been affirmed at ‘BBB-‘, while Indian Bank has been affirmed at 'BB+' stating that the outlook on the IDRs is stable.

Further, Fitch highlighted that PNB is the weakest among the state banks because of its stressed assets situation. The agency downgraded PNB’s viability rating by one notch to “BB” to reflect growing risk to the state owned bank’s capital position from its increasing stock of stressed assets. The downgrade also reflects Fitch’s expectation that capital buffers are unlikely to improve significantly even though the state is likely to inject capital into the bank in the FY16. However, Fitch siad that the outlook for Indian bank credit profiles in FY16 is more positive following the difficult year in FY15, when system-wide loans increased by 9.7%, the slowest pace in a decade. Fitch further stated that there are challenges from stressed sectors such as infrastructure and steel, high corporate leverage, and continued pressure on asset quality and capital.

According to Fitch, state owned banks which account for 85% of the total capital shortfall that Indian banks face in meeting Basel III capital requirements, and they account for close to 90% of the system’s stressed assets. Besides, the agency also stated that government’s seven-part plan to reform PSU banks could be a significant step towards increased transparency, better governance and greater accountability for the sector, provided government interference is minimized.

Additionally, on government’s capital infusion of Rs. 70,000 crore in public sector banks (PSBs) by FY19 (with Rs. 25,000 crore in FY16), Fitch said it should provide some support for the state-owned banks’ ailing balance sheets, but may not be sufficient, depending on banks’ credit growth expectations and persistent low equity valuations.

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