March 9, 2017 / 3:27 AM / 4 months ago

Fitch: Indian Banks Risk Skipping Coupons, Despite Forbearance

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Some Indian Banks Still at Risk of Skipping Coupons, Despite Forbearance here MUMBAI/SINGAPORE, March 08 (Fitch) Some Indian banks remain at risk of skipping coupon payments on capital instruments over the next couple of years; despite measures by the Reserve Bank of India (RBI) to ease pressures, and injections of government capital into state banks, says Fitch Ratings. Mid-sized state banks are the most at risk of breaching capital triggers. Distributable reserves at small- to mid-sized state banks were down by one third in 9M17 compared with financial year 2015 (FY15, to March 2015), reflecting persistent losses and weak internal capital generation. Five state-owned banks suffered losses that were equivalent to more than 30% of distributable reserves in 9M17 alone. The RBI's recent decision to allow banks to make additional Tier 1 (AT1) coupon payments from statutory reserves may have helped mitigate short-term coupon-deferral risks, but state banks' reserves are likely to continue falling. The RBI has made several regulatory adjustments in the last few years to avoid potential damage to sentiment in the domestic market for capital instruments. These changes have been applied to the sector as a whole and are not unique to India, but their timing suggests the RBI has felt pressure to provide headroom to state banks. Some banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements. Fitch's analysis indicates that the total capital adequacy ratio (CAR) of 12 banks was at or below the 11.5% minimum that will be a prerequisite for payment of coupons on both legacy and Basel III AT1 capital instruments by FYE19. There were also 11 banks with CET1 ratios at or below the 8% minimum that will be required to make coupon payments on AT1 instruments by FYE19. We estimate that banks require around USD90bn in new capital by FYE19 to meet Basel III standards - state banks account for around 80% of that. State banks are constrained in raising new equity due to heavy discounts on valuations while limited market depth remains a hurdle to issuing capital instruments domestically. Banks which are capable of tapping overseas markets have been reluctant to do so due to pricing concerns. This leaves state banks largely reliant on the government for recapitalisation. The USD10.4bn that the government has earmarked for capital injections into state banks is unlikely to be enough to support balance-sheet growth. The full report, "Fitch: Some Indian Banks Still at Risk of Skipping Coupons, Despite Forbearance" is available by clicking on the link above or via www.fitchratings.com Contact: Saswata Guha Director Financial Institutions +91 22 4000 1741 Wokhardt Tower, West Wing, Level 4 Bandra Kurla Complex, Bandra East Mumbai, 400 051 Jobin Jacob Associate Director Financial Institutions +91 22 4000 1773 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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