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) (BOB NZ), Punjab National Bank (PNB), Canara Bank, IDBI Bank, ICICI Bank and Axis Bank have been affirmed at 'BBB-' while Indian Bank has been affirmed at 'BB+'. The outlook on the IDRs is stable.
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. 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 Mar. 30, 2016 (FY16), with the bank's large stressed assets stock potentially taking longer to resolve than that of its peers.
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. There are, however, challenges from stressed sectors such as infrastructure and steel, high corporate leverage, and continued pressure on asset quality and capital. Fitch cut its India real GDP growth forecasts to 7.8% for FY16 from 8.0%, and to 8.1% for FY17 from 8.3%. State-owned banks 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.
A 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.
The announcement of a Rs 700 billion (USD 10.7 billion) capital injection in state banks by FY19 (with Rs 250 billion 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. Indian banks' stressed asset ratio rose to 11.1% in FY15 from 10% in FY14. The same ratio for state banks rose to 13.5% from 12% in FY14.
