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Fitch Affirms 8 Indian Banks' IDRs; Downgrades BoI's VR
June 27, 2017 / 8:38 AM / 3 months ago

Fitch Affirms 8 Indian Banks' IDRs; Downgrades BoI's VR

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, June 27 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of eight Indian banks as follows: - State Bank of India (SBI), Bank of Baroda (BoB), Bank of Baroda (New Zealand) Limited (BoB NZ), Punjab National Bank (PNB), Canara Bank (Canara), Bank of India (BoI), ICICI Bank Ltd. (ICICI) and Axis Bank Ltd. (Axis) have been affirmed at 'BBB-'. The Outlook on the IDRs is Stable. A full list of rating actions is at the end of this commentary. While BoI's IDR was affirmed, its Viability Rating (VR) has been downgraded to 'b+' from 'bb-', to reflect its weaker intrinsic risk profile compared with higher-rated peers. The bank's core capital buffer has dropped significantly due to persistent losses and it appears vulnerable to moderate shocks. Fitch is maintaining the negative sector outlook on Indian banks. This is based on our assessment that the sector's core capitalisation, which has been eroded in the last few years, will remain challenged unless it is boosted by adequate capital support from the authorities or equity raising from capital markets. In addition, Basel III capital migration is entering its final phase with capital requirements at their most onerous. Internal capital generation is expected to remain weak due to the banks' subdued growth outlook while there could be significant pressure stemming from continued provisioning due to ageing of outstanding non-performing loans (NPLs) and the potential resolution of some large NPLs. Loan growth at around 5% in the financial year ended March 2017 (FY17) was the lowest in many decades. While the banking sector's stressed-assets ratio rose as expected (FY17: 12.3%; FY16: 11.5%), new NPL additions moderated compared with FY16, a trend which was observed across most public-sector banks. Asset quality at large private banks also deteriorated, albeit from a relatively lower base. Fitch believes that asset quality could witness some further downside risks due to emerging concerns in the power and farm sectors although slippages are not likely to be as large as in previous years. Nonetheless, high credit costs will remain a challenge for the sector's earnings although some banks, private or public, may witness gradual improvement in return on assets (ROA) going forward. Banks with higher provision cover and relatively better capitalisation will be in a position to resume growth faster than banks which are constrained due to either weak fundamentals or regulatory restrictions such as prompt corrective action. Resolving both the asset quality and capital questions are important conditions for reviving the financial health of the sector. Recent capital raising activity by a few large public-sector banks is a positive, but for most of these banks' capital buffers have already been impacted due to losses and weak internal capital generation. We expect the estimated capital requirement for the sector to drop from our previous forecast of USD90 billion primarily due to lower expectations on loan growth. However, the government has only committed to inject USD3 billion of capital in public-sector banks by FY19, which appears insufficient to materially improve buffers against the risk of further potential losses from existing and new NPLs. The recent talks on consolidating public-sector banks may further threaten capital levels if a merger is not accompanied by adequate capital support from the authorities. Their VRs are vulnerable and there is a high risk that mergers could leave the resulting entity in a much weaker position. Stable liquidity is a strength for Indian banks, which has held up well despite the deterioration in their intrinsic credit profile. The surge in low-cost deposits for public-sector banks post demonetisation reflects the high depositor confidence that they enjoy due to government ownership. KEY RATING DRIVERS IDRS, SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs) The Long-Term IDRs of SBI, BoB, PNB, Canara, BoI and ICICI are driven by their SRs of '2' and SRFs of 'BBB-'. The SRs and SRFs reflect Fitch's expectation that they are highly likely to receive extraordinary support from the Indian government due to their high systemic importance and the government's majority ownership in all except ICICI Bank. The VRs of SBI and ICICI are at the same level as their IDRs and therefore, also act as drivers for their long-term ratings. Axis's IDR is driven by its VR of 'bbb-'. Its SRF and SR are lower at 'BB+' and '3', respectively, mainly due to its moderate systemic importance and private ownership. BoB NZ is a fully owned subsidiary of BoB and its IDR is driven by a high probability of support from its parent due to the strong integration between the two entities and BoB NZ's small size relative to the parent, which makes any potential support required manageable for the parent. The Stable Outlook on the IDRs of SBI, BoB, PNB, Canara, BoI and ICICI mirrors the Outlook on India's rating (BBB-/Stable). For SBI, ICICI and Axis, it also reflects a degree of stability in their standalone credit profiles, which are also drivers for their IDRs. VIABILITY RATING State Bank of India (SBI) SBI's VR of 'bbb-' is the highest among public-sector banks. It reflects the bank's superior asset and deposit franchise as India's largest bank and its diversified business and earnings, which were further bolstered with SBI's recent merger with its five associate banks in April 2017. SBI's reputation as a flight-to-safety bank underpins its robust deposit franchise, which is due to its very strong government links. This translates into both high depositor confidence and a consistently large share of government business. The rating also reflects the bank's superior capital flexibility in addition to capital support, which has been periodically forthcoming from the authorities. The bank's recent equity issuance of around USD2.3 billion in June 2017 (6.7% of FY17 consolidated equity) was the largest done by a bank in India. SBI's core capitalisation at FYE17 (CET1 ratio: 9.8% standalone; 9.9% consolidated) is higher than that of other state-owned banks despite the bank posting a small loss at the consolidated level in FY17. We estimate that the consolidated bank's Fitch core capital ratio would be higher by around 80bp if the additional capital is factored in. NPL ratio at the standalone entity was relatively stable (FY17: 6.9%) but the sharp jump at the consolidated level (FY17: 9%; FY16: 6.4%) was mainly due to the aggressive clean-up at the associate banks prior to the merger. As a result, while the standalone SBI reported an ROA of around 0.4% in FY17, at the consolidated level, it was a negative 0.01%. This was, however, accompanied by an improvement in specific loan loss cover at both levels. Bank of Baroda BoB's VR of 'bb+' reflects its better intrinsic financial profile than most of the other state banks due to its lower share of vulnerable loans and significantly better provision cover than its peers. This makes the bank's core capitalisation less vulnerable to new loan losses. The VR also factors in the bank's strong funding franchise and its pan-India reach as India's second-largest public-sector bank. The bank's core capitalisation is better than most public-sector banks despite a 130bp drop in CET1 ratio to around 9%, mainly due to a technical de-recognition of certain deferred tax assets, which offset the impact of both positive earnings and improving risk density. The bank also has better capital flexibility, given its higher equity valuation, and there is a possibility that fresh capital may be raised in the near term. Punjab National Bank (PNB) PNB's VR of 'bb' captures its relatively stable asset quality in FY17 coupled with a steady but improving specific provision cover ratio of around 41%. The bank's core capital ratios appear weak (CET1: 7.9% at FY17), which means that a fresh capital injection will be required to meaningfully improve buffers. Periodic capital support from the authorities has been inadequate to maintain these buffers, although a declining risk density has helped ratios. Absolute NPLs declined on the back of improved recoveries and higher write-offs, which more than offset incremental slippages. The gross NPL ratio fell marginally to 12.5% in FY17 as a result. Efforts to reposition the loan book and a continued strong focus on bad loan recovery should limit the potential of a further marked deterioration in its asset quality. The rating also captures PNB's stable funding profile, which is backed by a relatively robust customer-deposit franchise given its presence in the deposit-rich parts of the country. PNB is among the top three public-sector banks and enjoys a pan-India reach. Canara Bank (Canara) Canara's VR of 'bb' reflects its gradually stabilising asset quality that is partly offset by capital ratios which - though improved - are vulnerable to further stress. Canara raised fresh equity of around INR11 billion (3.3% of FY16 equity) in March 2017 via a rights issuance. This moderately enhanced capital buffers against the backdrop of weak internal capital generation. Canara's asset quality remains under pressure although the pace of deterioration has eased. Specific provision cover is low but it has witnessed a gradual improvement in recent years. The bank posted positive ROA in FY17 but profitability remains under pressure given the potential for more slippages and elevated credit costs. We expect internal capital generation to gradually improve but Canara will have to raise further capital if it plans to pursue meaningful growth. It may have to do so from the capital markets since ordinary capital support from the authorities will likely be lower for FY18 and FY19. Canara's VR also reflects its position and franchise as the fifth-largest Indian bank with a particularly strong presence in the south. Bank of India (BOI) BOI is a large public-sector bank that ranks sixth in India in terms of assets. The downgrade of BOI's VR to 'b+' reflects the bank's weak core capitalisation after a significant drop (FY17 CET1 ratio: 7.2%; FY16: 8%). Pre-emptive capital support from the authorities has not been adequate to support its ratios and its capitalisation remains susceptible to further loan losses due to a larger portfolio of vulnerable loans compared with its peers. The improvement in specific provision cover (FY17: 51%; FY16: 44%) is positive but does not preclude the need for a substantial capital injection. The rating also reflects the bank's somewhat weaker capital flexibility than its peers due to its lower equity valuation and smaller free float. ICICI Bank ICICI's VR of 'bbb-' primarily reflects its solid core capital ratio, which provides the bank with good buffers to absorb pressures from current and potential asset quality stress. ICICI's NPL ratio deteriorated to 7.9% in FY17 and was accompanied by a sharp drop in its specific provision cover (40% FY17; 51% FY16), resulting in a further decline in earnings. However, the bank's structural drivers of income remain strong and continue to provide it with a solid cushion to absorb more credit costs, if required. ICICI enjoys good access to equity capital markets. It sold a stake in its life insurance subsidiary in FY17, which supported the banks' equity position and a future sale of another stake in the business could be used to further support capital. The rating also reflects the bank's strong funding profile, which is underpinned by a large share of retail term and low-cost deposits. ICICI is the third-largest bank by assets and is one of only two banks designated as a domestic systemically important bank in India. Axis Bank Axis Bank's VR of 'bbb-' reflects its above-average capitalisation, which provides the bank an adequate cushion against moderate shocks. The bank's asset quality markedly deteriorated during FY17 to 5.2% from 1.7% in FY16, leading to a sharp decline in profitability (FY17 ROA: 0.66%; FY16: 1.78%). However, its gradually improving specific provision cover (56%) and the likelihood of stabilising asset quality should limit any material drop in profitability going forward. The bank may raise fresh equity in the near term, which would bolster capital buffers. Fitch expects improving funding costs to support profitability but credit costs are likely to remain elevated in FY18. Axis Bank's low-cost deposit ratio of 51% is among the highest in the industry. SENIOR DEBT The senior debt ratings of SBI, Bank of Baroda, Bank of India, ICICI Bank, Axis Bank and Canara Bank are at the same level as their IDRs as the debts represent unsecured and unsubordinated obligations of the banks. RATING SENSITIVITIES IDRS AND SENIOR DEBT The VRs of Bank of Baroda, PNB, Canara Bank and Bank of India are lower than their SRFs and their IDRs may be downgraded if factors underpinning the SRFs weaken. For SBI and ICICI Bank, where the VRs and SRFs are at the same level, their IDRs would only be downgraded if both the SRFs and the VRs were to be downgraded. A downgrade of India's sovereign rating will trigger a downgrade of the banks' IDRs that are at the same level as the sovereign. Likewise, a change in the sovereign's Outlook will also lead to a revision of the Outlooks on the banks' IDRs. However, a sovereign upgrade may not necessarily lead to an equivalent change in the IDRs of banks. Axis Bank's IDR is solely driven by its VR and a downgrade to its VR will lead to a downgrade in its IDR. Any changes in the banks' IDRs would result in equivalent changes in their senior debt ratings. VIABILITY RATING The 'bbb-' VRs of the private banks, ICICI Bank and Axis Bank, remain sensitive to any unexpected and/or significant asset quality deterioration, particularly if that is accompanied by a reduction in capital buffers, which currently support their ratings. The VRs of ICICI Bank and Axis Bank may also move down if the sovereign is downgraded as it is not common to have bank VRs above the sovereign rating due to operating environment-related risks. There is a negative bias on the VRs of SBI, Bank of Baroda, Canara Bank and PNB, which are sensitive to rising pressures on asset quality and capitalisation. These VRs factor in Fitch's expectation of fresh capital injections, the absence of which may weaken the banks' capital positions if asset quality continues to deteriorate. The VR of SBI is also sensitive to downward movement in the sovereign rating or Outlook. Bank of India's capital buffers are the lowest among its peers and an inability to materially improve capital buffers through fresh capital injections could lead to further rating action on the bank's VR. The theme of consolidation among public-sector banks has gained momentum in recent months. The authorities appear keen to reduce the number of government-owned banks and it is likely that the larger public-sector banks may be asked to play an active role to that effect. The intrinsic financial position of many public-sector banks is relatively weak and any proposed merger could put further pressure on their VRs if the additional risk is not mitigated through adequate capital injections. SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORs (SRFs) The SRs and SRFs are determined by the agency's assessment of the government's propensity and ability to support a bank, based on the bank's relative size and systemic importance. A change in the government's ability to provide extraordinary support due to a change in the sovereign ratings would affect the SRs and SRFs. The SRs and SRFs will also be impacted by any change in the government's propensity to extend timely support. The rating actions are as follows: SBI: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at F3' - Viability Rating affirmed at 'bbb-' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB-' - USD10bn MTN programme affirmed at 'BBB-' - USD4.65bn senior unsecured notes affirmed at 'BBB-' PNB: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at 'F3' - Viability Rating affirmed at 'bb' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB-' Bank of Baroda: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at 'F3' - Viability Rating affirmed at 'bb+' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB-' - USD3bn MTN Programme affirmed at 'BBB-' - USD1bn senior unsecured notes affirmed at 'BBB-' BOBNZ: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Support Rating affirmed at '2' Canara Bank: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at 'F3' - Viability Rating affirmed at 'bb' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB-' - USD2bn MTN programme affirmed at 'BBB-' - USD500m senior unsecured notes affirmed at 'BBB-' Bank of India: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at 'F3' - Viability Rating downgraded to 'b+', from 'bb-' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB-' - USD5bn medium-term note programme affirmed at 'BBB-' - USD1.75bn senior unsecured notes affirmed at 'BBB-' ICICI Bank: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at 'F3' - Viability Rating affirmed at 'bbb-' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB-' - USD3.2bn senior unsecured notes affirmed at 'BBB-' Axis Bank: - Long-Term IDR affirmed at 'BBB-'; Outlook Stable - Short-Term IDR affirmed at 'F3' - Viability Rating affirmed at 'bbb-' - Support Rating affirmed at '3' - Support Rating Floor affirmed at 'BB+' - USD5bn MTN programme affirmed at 'BBB-' - USD2bn senior unsecured notes affirmed at 'BBB-' Contact: Primary Analyst Ambreesh Srivastava Senior Director +65 6796 7218 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analysts Saswata Guha (State Bank of India, Bank of Baroda, Bank of India) Director +91 22 4000 1741 Jobin Jacob (Punjab National Bank, Canara Bank, ICICI Bank, Axis Bank) Associate Director +91 22 4000 1773 Committee Chairperson Tim Roche Senior Director +61 2 8256 0310 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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