Sector outlook cut, bank stocks bleed

Moody’s downgrades outlook from stable to negative; overreaction, say bankers; SBI’s NPA worries also take toll.

Bank stocks took a serious hit today after global rating agency Moody’s fired its latest salvo: a downgrade of the Indian banking industry outlook from stable to negative. The State Bank of India’s result, which beat the Street’s profit estimates but accentuated concerns over asset quality, added fuel to the fire.

The banking index fell the sharpest, 2.62 per cent, while broader indices Sensex and Nifty dropped 1.18 and 1.20 per cent, respectively. Banking stocks, SBI, ICICI Bank and HDFC Bank, contributed 90 points to the Sensex’s fall of 207 points. Moody’s cut its outlook for India’s banking system to negative from stable on concerns over rising challenges in the operating environment, which may adversely affect asset quality, capitalisation and profitability.

Vineet Gupta, vice-president and senior analyst at Moody’s, said, “India’s economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates. At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market.”

A “negative” outlook is one that is characterised by volatility and uncertain conditions. The outlook applies for the next 12-18 months. Moody’s currently rates 15 commercial banks in India, which together had a 66 per cent share of the total banking assets as of March. However, leading bankers were surprised by the move. “I think they are overreacting. But, possibly, they are worried about what is happening to banks worldwide and they are predicting the worst,” SBI chairman Pratip Chaudhuri said.

Finance secretary D K Mittal told a TV channel about 75 per cent of banking in India was done by public sector banks. “They are well capitalised above the Basel II requirements. NPAs would rise as the global economy is going through a challenging phase. However, NPAs for Indian banking are not going to touch the 12 per cent level as Moody’s thinks,” he said.

Speaking on the sidelines of a conference, HDFC chairman Deepak Parekh said, “I don’t think the Indian banking system is at risk... it is safe and robust.

The downgrade would have been justified in a few months from now if the profitability of banks was disturbed. Profitably of banks is good currently.”

Gunit Chadha, CEO of Deutsche Bank, echoed the view. “I am surprised with the negative outlook. I think the banking system is in good shape.”

SBI’s result did not help matters. It reported a 12 per cent increase in its net profit, after two quarters, to Rs 2,810 crore for the quarter ended September 30. The bank, however, reported an increase in its non-performing assets. It saw fresh slippages of Rs 8,000 crore during the quarter while the recovery, including upgrade of loans, was Rs 1,800 crore. Slippages from restructuring accounts were Rs 1762 crore during the quarter. Last month, Moody’s had downgraded the financial strength rating of SBI to D+/Stable/Baa3 from C-/Stable/Baa2.

The rating agency said Indian banks’ asset quality was likely to worsen, leading to higher provisioning needs in 2011-12 and 2012-13. Loan growth is also likely to strain banks’ capital cover even though credit expansion is expected to moderate to 16-18 per cent by the end of the next financial year from 21 per cent last year.