S&P Ratings expects weakness in banks asset quality to persist

Standard & Poor's Ratings Services expects weakness in ‘Indian’ banks asset quality to persist for the next year because economic recovery is likely to be tepid. Further, the weak asset quality is likely to put pressure on bank's profitability and capitalisation in fiscal 2015.

While projecting improvement in growth to 6% in fiscal 2015, from an anticipated 4.8% growth in fiscal 2014, the rating agency said the economic recovery will likely get reflected in improvements in the performance of the banking sector with a lag.

“We expect weakness in banks asset quality to persist for the next year because economic recovery is likely to be tepid, and it will take time for domestic industrial activity to recover and corporate balance sheet leverage to decline,” said the ratings agency in its report “India Banking Outlook 2014: Little Respite In Sight”.

S&P said its outlook on the 11 banks (State Bank of India, ICICI Bank, Bank of India, HDFC Bank, Union Bank of India, Axis Bank, IDBI Bank, Indian Overseas Bank, Indian Bank, Syndicate Bank and Kotak Mahindra Bank) that it rates in India is negative to reflect the outlook on the sovereign credit rating on India.

The ratings agency said “We believe the stand-alone credit profiles and ratings on Indian banks are also sensitive to deterioration in their asset quality, and capital and earnings.

“The capitalisation of the banks could deteriorate if they are unable to raise enough capital to compensate for their growth or weak earnings.”

Indian banks have sizable capital needs to support growth and meet Basel III capital requirements, which kicked in on April 1, 2013, and will gradually increase till 2018.

According to S&P, rated private-sector banks are better placed than their public-sector peers in terms of meeting Basel III capital requirements.

“These banks (private sector banks) have better current capitalisation, higher internal capital generation, and greater investor appetite because of their healthier asset quality and stronger profitability,” it said.

Rated public-sector banks will have to rely on a combination of government capital infusion, additional Tier 1 hybrid instruments, and equity markets to support their capitalisation.

The government has infused about Indian rupee Rs 58,600 crore of equity into these banks in fiscals 2011-2014, and S&P expect such support to continue. However, the government's capacity to keep providing sufficient and timely capital is a risk.

“Simultaneous equity issuances by many banks as well as negative sentiment on emerging markets could pose challenges for raising capital. This was evident in State Bank of India's recent equity-raising, which had to be aided by government-owned Life Insurance Corp. of India. Delays in raising capital could also limit loan growth for some public-sector banks,” said S&P.

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