Fitch cuts viability ratings of PNB, BoB, Indian Bank

Affirms issuer default rating for SBI, IDBI, ICICI and Axis Bank

Rating agency Fitch has downgraded the viability rating of Punjab National Bank, Bank of Baroda and Indian Bank from ‘bbb-’ to ‘bb+’, citing deteriorating asset quality and higher provisioning for stressed assets portfolios.

Revenue growth was slowing due to lower loan growth and the margins were squeezed due to high funding costs; this had led to pressure on internal capital generation, Fitch said.

It also cut Chennai-based Indian Bank’s long-term (LT) issuer default rating (IDR) from ‘BBB-‘ to ‘BB+’. The agency affirmed the LT IDRs of State Bank of India (SBI), Canara Bank, IDBI Bank, ICICI Bank and Axis Bank at ‘BBB-’. Following the rating action, the outlook on the IDRs of the nine banks is stable.

Fitch also affirmed the viability ratings of SBI, ICICI Bank and Axis Bank at ‘bbb-’, Canara Bank at ‘bb+’ and IDBI Bank at ‘bb’.

The rating actions follow a review of the Indian banking sector against the backdrop of sharp deceleration in economic growth and Fitch’s expectation of further deterioration in asset quality. The economic slowdown was likely to be more protracted than initially expected, owing to the currency volatility in recent months and the persistent high inflation, Fitch said in a statement.

The asset quality of Indian banks (particularly state-owned ones) would worsen, the rating agency said, adding this might result in more stressed assets than initially estimated; such assets would peak in FY15, rather than this financial year. The equity buffer of many public sector banks seemed increasingly stretched compared to their private peers, despite regular capital injections from the government, it said.

At the end of June this year, the stressed asset books (gross non performing loans and restructured loans) of Indian banks stood at 10 per cent of loans. Non-performing assets stood at 3.9 per cent.

Fitch said the outlook for the agriculture sector had improved following a good monsoon, and this would provide some cushion to the expected decline in growth. Stress tests show most public sector banks are sensitive to further deceleration in economic growth, owing to their high exposure to the infrastructure and cyclical sectors, as well as their high foreign-currency lending.

For private banks, earnings and capital buffers were at levels significantly higher than those at their state-owned counterparts.