UBS downgrades India to ‘neutral’ from ‘overweight’

The stock market may be rising but not the country’s stock. Global financial services firm UBS and credit rating agency Moody’s turned negative towards India and its banking system.

UBS downgraded India to ‘neutral’ from ‘overweight’ even as it upgraded China to ‘overweight’.

“We still like India at the micro level a lot,” UBS said, and added that a re-rating of China over the coming weeks is likely to make India “pale” by comparison.

Global ratings agency Moody’s Investors Service maintained its negative outlook on India’s banking system, reflecting the negative effects of currency volatility, persistent inflation and slowing economic growth.

“Asset quality will continue to deteriorate, particularly for public sector banks. At the same time, profitability will likely remain weak, limiting internal capital generation,” Moody’s said in the report.

The stock market, however, shrugged off the observations of UBS and Moody’s with the benchmark BSE Sensex jumping 451 points to close at 20,851.

Following UBS and Moody’s moves, other global investment banks and credit rating agencies, too, may take a hard look at India and its banking system.

According to Moody’s, while the asset quality of private sector banks has largely remained stable, the combination of non-performing assets (NPAs), or bad loans, and restructured loans has grown as a percentage of gross loans at public sector banks.

Reserves for loan losses remain weak and further provisions to sustain coverage will reduce profitability, it said in a report.

The report titled ‘India banking system outlook’ details Moody’s expectation on banks’ creditworthiness over the next 12-18 months. It also pointed out that Indian banks continue to have sound liquidity metrics, underpinned by a sizable domestic deposit base and minimal reliance on wholesale funding.

Gene Fang, Vice-President and Senior Analyst, Moody’s, said, “While structural issues related to the infrastructure sector are not new, the recent downturn in economic growth has exacerbated these problems and increased their negative effects on asset quality.”

Capital infusion

At the same time, systemic support remains strong, with more capital infusion by the Government towards public sector banks. Moody's, which rates 15 banks in India — 11 public and four private — expects Government support for this sector to be sustained, regardless of the 2014 election outcome.

“As India is currently coping with adjustments related to the economic cycle, how growth rebounds next year will have an impact on the credit profiles of Indian banks. In addition, continuation of reforms in infrastructure after next year’s election could contribute positively to the health of banks’ balance sheets,” Fang said.

(This article was published on November 18, 2013)
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