Standard & Poor's Ratings Services has revised the rating outlooks on 11 Indian banks and financial institutions to stable from negative. These banks include ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, State Bank of India, Bank of India, IDBI Bank Ltd, Indian Bank, Union Bank of India, IDFC and Kotak Mahindra Prime.
This is following an outlook revision on the sovereign credit rating on India (BBB-/Stable/A-3), the US-based rating agency said in a statement.
At the same time, the outlook is still negative on Indian Overseas Bank (IOB) and Syndicate Bank, reflecting a possible weakening in these banks' asset quality and capitalisation.
“Standard & Poor's does not rate Indian banks and financial institutions above the rating on the sovereign because of the direct and indirect influence that the sovereign in distress would have on a bank's operations, including its ability to service foreign currency obligations. In our view, the sovereign is able to influence these entities because: they are subject to Government policy and regulation; they invest a significant portion of their funds in Government securities; a high proportion of their revenue comes from domestic operations; and some of them are majority owned by the Government,” S&P said.
It added that it could downgrade Syndicate Bank if its asset quality deteriorates to below industry average levels or if the pre-diversification risk-adjusted capital (RAC) ratio falls below 5 per cent, which may happen if the bank grows aggressively and is unable to support growth with sufficient capital infusion. We could revise the outlook to stable if Syndicate can sustain its asset quality in line with industry levels. The ratings on Syndicate Bank continue to reflect the "very high" likelihood of Government support for the bank and the bank's average domestic business franchise and satisfactory funding and liquidity position. Syndicate's low earnings diversity and moderate capitalisation temper the ratings.
“In our view, IOB relies on large capital infusion on an ongoing basis to support its growth owing to its low retained earnings. We could downgrade IOB if the bank is unable to raise sufficient capital to support growth, such that its RAC ratio dips below 5 per cent. We could also lower the rating if IOB's asset quality continues to deteriorate. Conversely, we could revise the outlook to stable if the bank is able to raise sufficient capital to support future growth or stem the deterioration in its asset quality over the next 12 months. The ratings on IOB reflect a "very high" likelihood of Government support and the bank's average domestic business franchise and strong liquidity position. IOB's low retained earnings and weak asset quality temper the ratings,” it said.