S&P paints a grim picture for banks' equity offerings

Retains negative outlook on Indian banks

Rating agency Standard & Poor’s (S&P) on Monday said simultaneous equity issuances by many Indian banks and negative sentiment on emerging markets could pose challenges in raising capital.

This was evident in State Bank of India (SBI)'s recent equity-raising, which had to be aided by government-owned Life Insurance Corporation of India. Delays in raising capital could also limit loan growth for some public sector banks, S&P said. Banks need sizeable capital to support growth and meet Basel-III capital requirements. The private sector banks are better placed than their public sector counterparts in terms of meeting Basel-III requirements. Public sector banks would have to rely on a combination of government capital infusion and equity markets to support their capitalisation, it said, in its report titled: India Banking Outlook 2014: Little respite in sight.

S&P said the Indian banking sector would continue to suffer from pressures on asset quality, profitability and growth in 2014-15. This despite an uptick in the economy, pegged to expand at six per cent in FY15.  

The loan-to-deposit ratio of Indian banks will remain stable over the next one year because of the muted loan growth. This is in contrast with the past decade, when loan growth outstripped deposit growth.

According to the Reserve Bank of India (RBI), deposits grew 17.7 per cent in 12 months till January 24, 2014 — up from 13.1 per cent in the previous 12 months. The tempo of loan growth moderated to 14.7 per cent in 12 months from 16 per cent a year ago.

Referring to health of bank loans, the ratings agency said the asset quality was expected to remain weak due to slow economic growth, elevated interest rates, and high leverage of companies in distressed sectors.

The ratio of stressed assets (gross non-performing loans plus standard restructured advances) to total loans could increase to about 12 per cent by the end of financial year 2015 from 10.2 per cent at the end of September 2013.

Amit Pandey, S&P's credit analyst, said, the economic recovery was likely to be tepid, and it would take time for the domestic industry to recover and corporate balancesheet leverage to decline.

Loans to infrastructure, metals and mining, and textiles sector have the largest share of stressed assets at the end of September 2013.

Loans accounted for about one-fourth of total bank credit, but contributed half of the stressed loans, it said.