Fitch Ratings has affirmed the ratings on nine Indian banks. The Long-Term Issuer Default Ratings (IDR) on State Bank of India (SBI), Bank of Baroda, Bank of Baroda (New Zealand), Punjab National Bank (PNB), Canara Bank, IDBI Bank, ICICI Bank and Axis Bank have been affirmed at 'BBB-'.
"PNB's Viability Rating (VR) has been downgraded by one notch to 'bb' to reflect the growing risk to the bank's capital position from its mounting stock of stressed assets, which has risen at a faster rate than its capital replenishment," Fitch said in a statement.
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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 financial year ending March 30, 2016 (FY16), with the bank's large stressed assets stock potentially taking longer to resolve than that of its peers.
Indian Bank has been affirmed at 'BB+' and the outlook is stable.
"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 per cent, the slowest pace in a decade," the statement said.
However, it added that there are challenges from stressed sectors such as infrastructure and steel, high corporate leverage, and continued pressure on asset quality and capital.
Fitch has cut its India real GDP growth forecasts to 7.8 per cent for FY16 from 8.0 per cent, and to 8.1 per cent for FY17 from 8.3 per cent.
Banks capital requirement
State-owned banks account for 85 per cent of the total capital shortfall that Indian banks face in meeting Basel III capital requirements, and they account for close to 90 per cent of the system's stressed assets, Fitch said.
According to the rating agency, the seven-part plan to reform India's state-owned banks could be a significant step towards increased transparency, better governance and greater accountability for the sector, provided government interference is minimised.
"The plan aims to reward capital efficiency and operational productivity and signals a move away from the previous system, which strongly emphasised asset and deposit growth," it said.
Capital infusion
The announcement of a Rs 70,000 crore ($10.7 billion) capital injection in state banks by FY19 (with Rs 25,000 crore in FY16) 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.
The banks' stressed asset ratio rose to 11.1% in FY15 from 10% in FY14. The same ratio for state banks rose to 13.5 per cent from 12 per cent in FY14.