$6 bn capital raised by PSBS inadequate to safeguard against stress: Fitch

PSB divestment may trigger negative rating action

The public sector banks’ plan to raise $6 billion in fresh equity capital is inadequate to mitigate anticipated risks from economic disruptions caused by the Covid-19 pandemic. They will need additional capital support from the government, their owner, to absorb stress, according to Fitch Ratings.

The rating agency also warned that reduction in the state's majority shareholding in some banks may dent depositor confidence and could lead to negative rating action as their long-term ratings are anchored to state support.

Several large state-owned banks have recently announced plans to raise a total of around $6 billion in fresh equity from the capital market. State-owned banks already face significant execution risks in raising equity due to depressed stock market valuations and weak investor interest, the agency said in a statement.

"The proposed capital amounts, if raised fully, will likely add only around 100-150 basis points to state banks' existing common equity Tier-1 (CET1) ratios. Under our high stress scenario, this may provide some interim capital relief, testing the banks' ability to raise fresh equity on their own. But, it will not be enough to stave off heightened solvency risks. It would also increase the prospect of further regulatory forbearance," the agency said.

Fitch said a recent news report citing the government's plan to reduce the number of state banks to five from 12 while selling majority stakes in several others, including Bank of India could add to uncertainties.

It may also reduce investor appetite at a time when government capital support has stuttered, and an acceleration in new coronavirus cases is hampering a meaningful economic recovery and increasing risks for banks' balance sheets.

“We believe the proposed stake sales will be very challenging in the current economic climate and in light of the potential capital shortfalls we calculate at the state banks in our stress test. It could also require amendments to the banking company acts, which currently prescribe a minimum government shareholding of 51% for the state banks, thus adding to execution risk”, Fitch said.