Banking sector to struggle for two more years amid NPA woes, says Fitch

The performance of India’s banking sector is likely to be below average for the next two years because it is struggling with poor asset quality and weak core capitalisation, said rating agency Fitch.
 
Fitch lowered the operating environment assessment to “BB+” from “BBB”, based on the review of performance in past three years. The assessment factors in the review of the regulatory framework and the outlook in the near to medium term, it said in a statement.
 
Meanwhile, Fitch affirmed the “BBB-” Long-Term Issuer Default Ratings (IDRs) of the following six Indian banks: State Bank of India, Bank of Baroda (B, Bank of Baroda (New Zealand), Punjab National Bank, Canara Bank and Bank of India (BOI). It affirmed IDBI Bank's Long-Term IDR at 'BB+'. The ratings come in the backdrop of a challenging operating environment.

 
Fitch maintained Bank of Baroda’s (BoB’s) Viability Rating on Watch Negative (RWN), because it may take a few more months before the impact of its merger with two mid-sized state-run banks, Vijaya Bank and Dena Bank, is visible on its combined financial position.
 
Fitch said it had compared India to other sovereign jurisdictions in Asia in the “BBB” category on the basis of key metrics of gross domestic product per capita and the ease of doing business ranking. “The likely below average performance of the sector over the next two years is in spite of our expectations of high economic growth and improving business prospects in India,” the rating agency said. The banks, which still remain the biggest credit intermediaries, are positioned to leverage this growth opportunity.
 
They would be in a position to exploit opportunities if their damaged balance sheets are remediated sustainably with fresh equity that encourages the banks to support growth in a meaningful way.
 
Indian banks’ impaired loans ratio has declined to 10.8 per cent in April-December FY19 from 11.5 per cent in the financial year ended March 2018 (FY18), marking a reversal in trend. At the same time, the government's capital injection of over $14.5 billion in FY19 has lifted the capital position of many state-owned banks from recent historical lows. However, the capital buffers are still moderate and do not leave much room for growth.