Asset quality of nine state-owned banks remains under pressure: Fitch

Fitch Ratings has affirmed the ratings on nine Indian banks stating that the asset or the loan quality of state-owned banks remains under pressure.

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, 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 IDRs is stable, Fitch said in a note.

“Asset quality at state-owned banks remains under pressure, while certain large banks' non-performing loans (NPLs) and restructured loans have grown at a slower pace in the recent two quarters,” the rating agency added.

SC ruling on coal assets

Early signs of deleveraging in the corporate sector are encouraging. However, the impact of the Supreme Court ruling on coal assets may be less onerous than expected if productive assets are allowed to continue operating without disruption.

“Fitch expects the pressure on asset quality at the rated banks to persist for another couple of quarters. The banks, particularly the state-owned ones, will increasingly focus on raising capital to meet more stringent capital requirements under the Basel III regulatory framework, which will be progressively implemented in India.''

Viability ratings

In addition, the viability ratings (VRs) of certain banks will continue to be under pressure, but the affirmations on their VRs factor in efforts to raise capital and the expectation that asset quality would not deteriorate materially from current levels and reach their worst during the current financial year.

SBI, ICICI Bank and Axis Bank are the only ones among Fitch's rated Indian banks to have investment-grade VRs of 'bbb-', reflecting their superior stand-alone credit profiles.

The drivers for the private banks' (ICICI Bank and Axis Bank) VRs are their strong capital metrics, better-than-average asset quality, good profitability, robust funding profile and better management quality.

ICICI Bank has had a consistently strong capitalisation track record, while Axis Bank has managed its asset quality better and made notable improvements to its capitalisation and retail funding.

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