Fitch affirms Issuer Default Rating on four PSBs including SBI

Upgrades viability rating for IDBI Bank by a notch due mainly to improved core capitalisation and the high loan-loss coverage

Fitch Ratings today affirmed ratings on four public sector banks–-State Bank of India, Bank of Baroda, Punjab National Bank and Bank of India.

It affirmed Issuer Default Ratings (IDRs) at 'BBB-' for the lenders.

The rating agency has maintained negative outlook on ratings. It mirrors the Outlook on India's sovereign rating of 'BBB-', which was revised to Negative from Stable on June 18, 2020. The revision factored in the impact of the escalating coronavirus pandemic on India's economy.

The agency has also upgraded private lender IDBI Bank’s Viability Rating (VR) by one-notch from “ccc” to “ccc+”. The upgrade in VR is due mainly to the improved core capitalisation and the high loan-loss coverage. This provide some resilience to the capital buffers against potential asset-quality stress. It also factors in the possibility for more fresh capital in the current financial year (FY21). If successfully raised, it can provide a significant philip to the capital buffers, it said.

Referring to the operating environment, Fitch said it remains challenging for Indian banks despite a moderate revival in economic activity caused by gradual easing of the lockdown since May 2020.

Fitch estimates that India’s real Gross Domestic Product (GDP) would shrink by 10.5 per cent in year ending March 2021. But it expects India's real GDP to rebound to 11 per cent in FY22, but largely as a result of the low base.

The economic contraction is likely to result in protracted weakness in the asset-quality cycle, which could manifest in significantly higher stressed loans. There could be more write-offs over the next few years, even though Indian banks' latest 2QFY21 earnings present a more benign picture.

Fitch believes a speedy economic recovery is critical for the sector to rebound meaningfully. Rating agency expects a moderately worse landscape for the Indian banking sector in 2021 on weak prospects for new business and revenue generation.

Private banks with stronger loss-absorption buffers will be in a better position to benefit from the recovery against state-owned counterparts, which are generally burdened with greater balance sheet challenges and weaker loss-absorption buffers.