Mid-sized public sector banks will continue to face profitability pressures as increasing asset quality charges are likely to offset any gains from the uptick in credit, according to India Ratings and Research, a Fitch group company.
The credit rating agency maintained stable-to-negative outlook on public sector banks (PSBs) while maintaining its stable outlook on private banks. According to the agency, weak capitalisation and high funding gaps are likely to constrain the outlook of PSBs.
Large private banks and a few large PSBs are better placed with healthy internal accruals, robust capitalisation and better access to capital, it added.
Capital requirement Estimating an incremental capital requirement of ₹2.9 lakh crore (including ₹1.5 lakh crore common equity Tier 1) for PSBs till FY19 for achieving the Basel-III transition, the agency said that the capital situation was worsening despite government support. “Support from the government remains critical for PSBs, given their low internal accruals (profit), eroded equity valuations and the risk of further slippages due to their exposure to highly-levered corporates,” India Ratings added. Assaying about one-third of the corporate sector borrowing from banks to be deeply stressed currently (totalling 21 per cent of bank credit), India Ratings expects the stress from PSBs exposure to highly- leveraged corporates to persist over the next few years while expecting the impaired assets ratio to inch up to 12 per cent by FY16 and 12.5 per cent by FY17. This includes receipts from asset reconstruction companies but excludes discom bonds.
Also, India Ratings observed that schemes, such as 5/25, strategic debt restructuring and the recent discom (state electricity distribution companies) restructuring package are all likely to help contain the impaired asset ratios.