Moody's upbeat on Indian banking, Fitch sees weaknesses

The govt's credit strength is an important input in Moody's deposit and debt ratings

Rating agency Moody’s on Thursday affirmed the long-term ratings and changed the outlook for 12 public sector banks (PSBs) and financial institutions to ‘positive’ from ‘stable’ in tandem with the upgrade in outlook on India’s sovereign rating to ‘positive’.

It downgraded the local currency bank deposit ratings and the senior unsecured ratings of three private sector banks — Axis Bank, HDFC Bank and ICICI Bank — to “Baa3/P-3’ from ‘Baa2/P-2’. However, it changed the outlook to “positive”.

Of 12 entities affected are eight PSBs — State Bank of India, Bank of Baroda, Bank of India, Canara Bank, Oriental Bank of Commerce, Punjab National Bank, Syndicate Bank, and Union Bank of India. The financial institutions are Export-Import Bank of India, Indian Railway Finance Corporation, Power Finance Corporation and Rural Electrification Corporation.

Moody’s said the government’s credit strength is an important input in Moody’s deposit and debt ratings for financial institutions, as it impacts assessment of the government’s capacity to provide support in times of stress.

As such, an improvement in the government’s own creditworthiness, as measured by its sovereign rating, has the potential to lift the supported ratings for the financial institutions.

The assignment of a positive outlook on the sovereign’s and the financial institutions’ ratings signals a higher probability of the sovereign providing support to the financial institutions in times of stress.

T M Bhasin, chairman, Indian Banks’ Association (IBA), said upgrading India’s rating outlook to ‘Positive’ from ‘Stable’ by Moody’s is a welcome sign as a whole and for the banking sector in particular. The rating change endorses the changed economic scenario in the country and also offers opportunity to attract higher inflows of international funds and deepen the bond markets.

Meanwhile, another global rating agency Fitch said the performance of the banking sector will likely remain weak for some time, although the pace of deterioration in asset quality has eased at a few large banks. PSBs remain particularly affected, accounting for around 90 per cent of the system’s stressed assets while suffering from sharply reduced earnings and weak capitalisation.

The government’s ability to provide substantial financial support to the banking system in a potential crisis is limited given the already high government debt burden, Fitch added.

Referring to rating action on three private banks, Moody’s said rating them was driven by the change in view that the capacity for government support is limited to a government’s bond rating, rather than previous expectation that banks in India could benefit from additional support through other policy tools.

At the same time, the outlook on all the long-term ratings of the three banks has been changed to positive from stable, in line with Moody’s revision of the outlook on the Government of India’s Baa3 bond ratings to positive from stable.