Fitch downgrades viability rating for Canara Bank; IDBI Bank

Flagging risk over asset quality and capital adequacy, global rating agency Fitch on Tuesday downgraded the viability rating (VR) for two public sector lenders -Canara Bank and IDBI Bank.

The rating agency also revised the sector outlook on Indian banks to 'negative' from 'stable'. There are more downside risks for bank VRs, unless the risks of deteriorating asset quality and weak earnings are counterbalanced by sizeable capital infusion.

The Indian banking system needs around $90 billion of capital, while many public-sector banks (PSBs) are likely to find it difficult to access new capital from other sources, Fitch said.

The VRs of Canara Bank were downgraded by one notch to 'BB' and for IDBI Bank to 'BB-'. The revision in VR ratings reflects their weaker intrinsic risk profiles, compared with higher-rated peers.

Both banks' capital positions are at greater risk because stressed assets have increased at a faster clip than capital replenishment, Fitch said.

Referring to Canara Bank, Fitch said Canara's VR factors in its good franchise and market position. But, the one-notch downgrade to 'BB' reflects the sharp deterioration in asset quality.

Canara Bank's core capitalisation is relatively weak, making it vulnerable to further erosion due to a significant increase in ratio of unprovided non-performing assets to equity at 66 per cent in FY16, from 27 per cent in FY15, Fitch said.

On IDBI Bank, Fitch said the one-notch downgrade of IDBI's VR to 'BB-' reflects a sharper deterioration in the bank's asset quality than expected. Its larger proportion of loans are at risk of being classed as vulnerable, compared with most other banks.

IDBI's VR also factors in its lower pre-provision earnings and weaker core capitalisation, which is at risk of further erosion in the absence of significant capital injection. The rating takes into account the progress IDBI Bank has made in improving its low-cost deposit ratio, but at 26 per cent, it is the weakest amongst large public sector banks, Fitch said.

Banking sector non-performing assets rose sharply in the financial year ended  March FY16 as a result of stricter NPL recognition standards. Asset quality could deteriorate further over the next 12-18 months, given the banks' exposure to stressed sectors such as infrastructure and iron and steel, and the difficult resolution process for stressed assets in the near term.

Earnings for the sector are also likely to be weak due to muted loan growth and high credit costs.

Indian banks' capital positions have historically been weak. The situation has worsened for most PSBs due to delayed recognition of problem assets and high loan-loss provisions.

The situation will remain weak in the near term, unless the government makes significant capital investment in the banks.

The government is committed to inject $7 billion of capital in PSBs by FY19, out of a budgeted investment of $11 billion. However, the government or other related entities are likely to have to inject more funds.