Fitch Ratings has downgraded the viability rating (VR) of State Bank of India (SBI) and Bank of Baroda (BoB) by one notch to bb+ and bb, respectively, reflecting their weakened intrinsic risk profile due to the negative effect of poor asset quality and earnings on their capital position.

The banks’ core capital buffers also appear more vulnerable to moderate shocks, the global credit rating agency said in a statement.

Viability Ratings (VRs) measure the intrinsic creditworthiness of a financial institution, and reflects Fitch’s opinion on the likelihood that the entity will fail. The one-notch downgrade of SBI reflects the bank’s vulnerable core capitalisation from its prolonged asset quality problems and weak earnings. Fitch said SBI’s CET 1 (Common Equity Tier 1) ratio slightly declined to 9.7 per cent in FY18 as its net loss – the first in many decades – partly counterbalanced fresh capital-raising of $2.3 billion during the year (6.7 per cent of FY17 consolidated equity) and government capital. The agency believes the bank needs more capital for growth and to manage heightened balance sheet stress.

Fitch said the one-notch downgrade of BoB reflects increasing pressure on its capital position from extended financial weakness in terms of NPLs and earnings.

The public sector bank’s CET1 ratio – at 9.2 per cent – was slightly better despite losses and is higher than that of most state-owned peers. However, its NPL ratio jumped to 12.3 per cent, leading to deterioration in net NPL/Fitch Core Capital ratio to above 60 per cent, despite better provision cover of 58 per cent.

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