Standard & Poor's assigns stable outlook to 10 Indian banks

Global rating agency Standard & Poor's (S&P) has affirmed investment grade with ‘stable’ outlook to ten Indian banks, which includes State Bank of India (SBI), Axis Bank, Bank of India, HDFC Bank, ICICI Bank, IDBI Bank , Indian Overseas Bank, Syndicate Bank, Union Bank of India and Indian Bank.

The rating affirmation has come after applying new rating criteria for banks, which was announced last month. The rating has been retained at BBB- with the outlook at stable. The move is contrast with the another global rating firm Moody’s, which has downgraded its rating on State Bank of India’s financial strength by one notch to D+ on account of the lender’s low Tier-I capital ratio and worsening asset quality. This downgrading by Moody’s had evoked sharp decline in the shares of SBI. And it has got sharp reaction from the government and SBI who described the Moody’s move as unwarranted as the Indian banks are better than their global counterparts.

In October a couple of days after Moody's lowered the outlook on SBI, S&P said that it has upgraded India's risk profile as measured by S&P's BICRA ( Banking Industry Country Risk Assessments) ranking. Within a month after the BICRA review, S&P has said that four banks, which include SBI, would have had a better credit rating if it was not constrained by the country rating. S&P does not assign a foreign currency rating higher than that of the sovereign since local bank assets are predominantly in India.

Geeta Chugh, Director, Standard & Poor's said 'the rating review factors in some tolerance towards deterioration in asset quality and compression in earnings. The stable outlook takes into account expected developments in the next 18 to 24 months'. By adding further Chugh said the standalone credit profiles of these four banks are higher than the sovereign. But since in India we do not assign bank ratings above the sovereign, the overall rating is in line with that of India.

Indian Bank's high standalone credit profile reflects its superior funding and liquidity position and it is the only public sector bank with an adequate capital position. A decade ago Indian Bank was described as a weak bank, has turned around dramatically and it is now an outlier because of its superior position as compared to rivals.

As per the S&P, on the whole Indian banks benefit from good economic growth prospects in the country. The growth in business is expected to enable the banks maintain sound financial health. 'Indian banks benefit from high levels of stable, core customer deposits.

The liquidity position for many Indian banks is strong and is underpinned by the growing retail deposit base, low reliance on short-term wholesale borrowings and a sizable amount of government bonds and central bank balances. Given the strong balance sheet growth ... capital is therefore a rating weakness for these banks,' the rating agency said. The government has infused Rs 3,100 crore into public sector banks in FY11. 'The government's planned capital injection in banks in 2012 and subsequently to ensure that the government owned banks have at least 8% tier I capital will be beneficial for these banks,' S&P added.

The S&P’s rating affirmation for the Indian banks comes a day after S&P downgraded its rating for as many as 15 large banks globally, which includes large American banks like Bank of America, Citigroup and Goldman Sachs, which can be seen as another blow to the already-struggling banking sector in the weak global economic scenario. The rating agency has also downgraded rating of United States based banking giants such as JP Morgan, Morgan Stanley, Wells Fargo, whereas some European banking titans like Barclays, HSBC, Lloyds Banking Group, RBS (Royal Bank of Scotland) and Rabobank have also been downgraded.