Money & Banking

Outlook for public sector banks challenging: ICRA

Our Bureau Mumbai | Updated on January 12, 2018 Published on January 17, 2017

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With more control on loan quality, private banks better placed, says credit rating agency

The outlook for the Indian banking sector, especially for public sector banks (PSBs), remains challenging given their weak asset quality, consequent impact on internal capital generation and increasing capital requirements under Basel-III regulations, said credit rating agency ICRA.

Private banks, however, continue to be better placed on these parameters given their greater degree of control on asset quality.

ICRA said after three consecutive quarters of losses, PSBs reported marginal profits on an aggregate basis during the July-September quarter of FY17. However, it added that their internal capital generation remains weak as reflected by the aggregate losses of ₹1,160 crore during the first half of FY17, primarily on account of elevated credit costs.

According to Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, “With the declining bond yields, ICRA expects PSBs to report marginal profits during Q3 FY17. However, elevated credit costs will continue to impact profitability leading to low, single-digit return on equity (RoE) during FY17.

“In comparison, private sector banks are likely to perform better, though, on an aggregate basis, their profitability may also be lower than (in) the previous year. We expect aggregate private bank RoE of 11-12 per cent during the third quarter and FY17.”

Capital infusion

Capital requirements under Basel III will increase for both PSBs and private banks from March 2017.

Despite their limited growth in advances, ICRA felt that PSBs will be constrained to meet the regulatory capital requirements on account of their losses during the year, while private banks will face challenges on account of the continued growth in their advances and weakening internal capital generation. “The pressure on internal capital generation, relatively better investor appetite and increased capital requirements helped banks raise ₹25,030 crore (₹19,530 crore by PSBs and ₹5,500 crore by private banks) of Additional Tier 1 (AT1) bonds during the April-December period of FY17,” said Srinivasan.

ICRA expects more AT1 issuances during Q4 FY17 as six PSBs have lower than required regulatory levels of Tier I capital for March 2017.

The agency said it has been regularly highlighting the increasing risk of servicing the coupon on these bonds, especially for weaker PSBs which have been reporting losses and depletion of revenue reserves.

In the backdrop of weak capitalisation and losses, the government may need to increase the capital infusion plans beyond the ₹25,000 crore announced for FY17 if PSBs are unable to raise capital through AT1 bonds, it added.

Published on January 17, 2017
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