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Fitch Affirms Ratings on 9 Indian Banks; Pressure on Asset Quality
September 3, 2014 / 1:01 PM / in 3 years

Fitch Affirms Ratings on 9 Indian Banks; Pressure on Asset Quality

(The following statement was released by the rating agency) MUMBAI/SINGAPORE, September 03 (Fitch) Fitch Ratings has affirmed the ratings on nine Indian banks. The Long-Term Issuer Default Ratings (IDR) on State Bank of India (SBI), Bank of Baroda, Bank of Baroda New Zealand (BOB NZ), Punjab National Bank, Canara Bank, IDBI Bank, ICICI Bank and Axis Bank have been affirmed at 'BBB-' while Indian Bank has been affirmed at 'BB+'. The Outlook on the IDRs is Stable. A full list of rating actions is at the end of this rating action commentary. The Indian banking sector faces a challenging economic environment; although the new government's clear electoral mandate gives it the ability to pursue far-reaching economic reforms. Uncertainties and risks remain regarding implementation of key policies necessary to achieve the government's growth and fiscal deficit targets. Fitch has increased its real GDP growth forecast for the financial year ending March 2016 (FY16) to 6.5% from 6.0% and projects real GDP growth to pick up to 5.5% in FY15 from 4.7% in FY14. Asset quality at state-owned banks remains under pressure, while certain large banks' non-performing loans (NPLs) and restructured loans have grown at a slower pace in the recent two quarters. Early signs of deleveraging in the corporate sector are encouraging. However, a recent court ruling that the government's allocations of coal assets in 1993-2009 were illegal has cast a shadow on asset quality. However, the impact of the ruling may be less onerous than expected if productive assets are allowed to continue operating without disruption. Fitch expects the pressure on asset quality at the rated banks to persist for another couple of quarters. The banks, particularly the state-owned ones, will increasingly focus on raising capital to meet more stringent capital requirements under the Basel III regulatory framework, which will be progressively implemented in India. KEY RATING DRIVERS - IDRs, Support Rating (SR) and Support Rating Floor (SRF) The Long-Term IDRs of SBI, Bank of Baroda, Punjab National Bank, Canara Bank, IDBI Bank, and ICICI Bank are at their SRFs of 'BBB-'. The ratings are driven by their SRs of '2', which reflects Fitch's expectation that they are highly likely to receive extraordinary support from the Indian government, if needed, due to their high systemic importance and the government's majority ownership in all except ICICI Bank. Indian Bank - which is also state-owned - has an IDR and an SRF that are a notch lower than the large state-owned banks', driven by its lower SR. Indian Bank's SR of '3' reflects the moderate probability that it would receive extraordinary support from the Indian government, if needed, because of its moderate systemic importance stemming from its smaller size and more regional character. Axis Bank's IDR is driven by its VR at 'bbb-' while its SRF and SR are lower at 'BB+' and '3', respectively, mainly due to its private ownership. The Viability Ratings (VRs) of SBI, ICICI Bank, Axis Bank and Indian Bank are at the same level as their IDRs and therefore, act as drivers for their long-term ratings. BOB NZ is a fully owned subsidiary of Bank of Baroda and its IDR is driven by expectations of high support from its parent, Bank of Baroda, due to the various explicit and implicit linkages with the parent. KEY RATING DRIVERS - VRs The VRs of certain banks will continue to be under pressure, but the affirmations on their VRs factor in efforts to raise capital and the expectation that asset quality would not deteriorate materially from current levels and reach their worst during the current financial year. SBI, ICICI Bank and Axis Bank are the only ones among Fitch's rated Indian banks to have investment-grade VRs of 'bbb-', reflecting their superior stand-alone credit profiles. The drivers for the private banks' (ICICI Bank and Axis Bank) VRs are their strong capital metrics, better-than-average asset quality, good profitability, robust funding profile and better management quality. ICICI Bank has had a consistently strong capitalisation track record while Axis Bank has managed its asset quality better and made notable improvements to its capitalisation and retail funding. SBI, whose financial metrics are not as strong as ICICI Bank's and Axis Bank's, benefits from its large scale and status as a quasi-sovereign entity, which results in a solid funding profile and strong access to capital markets. A fresh equity injection of INR100bn (USD1.7bn) in FY14 in the bank has helped to replenish its capital buffers and raised its Fitch core capital (FCC) ratio to 10.5% in FY14 from 9.9% in FY13. The bank plans to raise another INR200bn (17% of FY14 equity) over the next two years, which should hold capital buffers steady. The stressed assets ratio improved to 8.3% in 1QFY15 from 8.4% in FY14. The VRs of Bank of Baroda, Canara Bank and Punjab National Bank are rated one notch lower at 'bb+', although Bank of Baroda's performance has been better than the other two in terms of capitalisation and exposure to stressed business sectors. Capital buffers for all three banks remain stretched, particularly at Canara Bank and Punjab National Bank, which was a key factor in the VR downgrades for all three in 2013 and 2012. Canara Bank's exposure to stressed sectors is among the highest in its peer group although its stressed asset ratio (9.5% in 1QFY15 up from 9.2% in FY14) is lower than state banks' average of 12% (FY14). The ratio continued to rise even though total loans rose by 22% in FY14. The VR affirmation reflects expectations that Canara Bank will raise additional equity. Although Punjab National Bank is more profitable than its peers, its capital buffers are thinner compared with its stressed assets stock of around 15% of total assets, the highest among the rated banks. The bulk of the stressed assets are restructured loans. Although the growth in restructured loans has slowed recently, its NPL ratio rose to 5.5% in 1QFY15 from 5.3% in FY14. Indian Bank's VR, which was also downgraded in 2013, reflects concerns about its rising stressed asset ratio (1QFY15: 11.9%), which are partly offset by its better capitalisation (FCC ratio of 12.6% in FY14) and slower loan growth. IDBI Bank's VR is the lowest among the rated banks, and it is the most vulnerable to a downgrade given rapid deterioration in the stressed asset ratio to 14.5% in 1QFY15 from 9% in FY13 and 14.1% in FY14, and a very thin capital buffer (FCC ratio of 8% in FY14). The bank has sharply slowed loan growth to focus on asset quality issues and is simultaneously seeking to raise capital. Fitch will view efforts to strengthen its capital buffers positively because the agency expects asset quality pressures to persist into FY15. KEY RATING DRIVERS - Senior Debt, Upper Tier 2 Debt and Hybrid Tier 1 Debt The senior debt ratings of SBI, Bank of Baroda, IDBI Bank, ICICI Bank, Axis Bank and Canara Bank are at the same level as the IDRs as the debts represent unsecured and unsubordinated obligations of the banks. Legacy Upper Tier 2 bonds are rated four notches below the VR for ICICI Bank, and three notches below the VR for Bank of Baroda and Canara Bank. The notching is in accordance with Fitch's assessment of each instrument's non-performance and loss-severity risk profiles. These subordinated debts are legacy instruments that are not Basel III-compliant. SBI's legacy perpetual Tier 1 bonds are rated five notches below its VR in accordance with Fitch's assessment of the instrument's non-performance and relative loss-severity risk profile. This legacy hybrid debt is not Basel III-compliant. RATING SENSITIVITIES - IDR and Senior Debt The VRs on Bank of Baroda, Punjab National Bank, Canara Bank, IDBI Bank and Indian Bank 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 VR were to be downgraded. A downgrade of India's sovereign rating (BBB-/Stable) will trigger a downgrade of all the banks' IDRs, which are currently 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 banks' IDRs. Axis Bank's IDR is solely driven by its VR and a downgrade to its VR, while unlikely in the near-term, will lead to a downgrade to its IDR. Any changes in the banks' IDRs would result in equivalent changes in their senior debt ratings. RATING SENSITIVITIES - VR, Upper Tier 2 Debt and Hybrid Tier 1 Debt The 'bbb-' VRs of the private banks, ICICI Bank and Axis Bank, are sensitive to any major change in the operating environment and unexpected asset quality deterioration. However, the VRs will be stable as long as the banks maintain adequate capital buffers. Axis Bank's VR would move down if the sovereign is downgraded. The VR of ICICI Bank may move up in tandem with an upgrade and would move down in line with a downgrade of the sovereign rating. SBI's VR is sensitive to unexpected deterioration in capitalisation and/or asset quality. Fitch views the recent capital injection in the bank positively as profitability will take time to recover. Periodic and adequate capital injections will be important in supporting the VR. The VR of SBI will be also sensitive to downward movement in the sovereign rating or outlook. The VRs of Bank of Baroda, Canara Bank, Punjab National Bank and Indian Bank are sensitive to rising pressures on capitalisation and asset quality, though Bank of Baroda's VR enjoys some support at the current level due to better capital metrics than peers and signs of improvement in asset quality. The VRs of Canara Bank and Indian Bank factor in capital increases, the absence of which could undermine capital buffers if asset quality continues to weaken sharply. Punjab National Bank's VR has very limited tolerance and any material deterioration from current levels of its asset quality, if not matched by adequate capital reinforcement, will likely lead to its VR being reassessed. Capital management is most critical for IDBI Bank's VR in light of continuing pressure on asset quality and earnings. Downward pressure on the VR could emerge if the pronounced deterioration in stressed assets continues without adequate additions to capital and/or the bank's funding mix tilts towards more volatile bulk deposits and certificates of deposit (CDs). The Upper Tier 2 and hybrid Tier 1 debt are all notched down from the VRs and will be sensitive to any change in the VRs. RATING SENSITIVITIES - SRs and SRFs The SRs and SRFs are determined by the agency's assessment of the government's propensity and ability to support a bank determined by its 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 willingness 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-' - USD5bn MTN programme affirmed at 'BBB-' - USD3.25bn senior unsecured notes affirmed at 'BBB-' - USD400m perpetual tier 1 bonds affirmed at 'B' Punjab National 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-' 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-' - USD 3bn MTN Programme 'BBB-' - USD500m senior notes under MTN programme affirmed at 'BBB-' - USD350m senior notes under MTN programme affirmed at 'BBB-' - USD 1bn senior unsecured notes under the MTN programme affirmed at 'BBB-' - USD300m upper tier 2 notes under MTN programme affirmed at 'B+' 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-' - USD350m of senior notes under MTN programme affirmed at 'BBB-' - USD500m of senior notes under MTN programme affirmed at 'BBB-' - USD250m upper tier 2 notes under MTN programme affirmed at 'B+' IDBI 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-' - USD5bn medium-term note programme affirmed at 'BBB-' - SGD250m senior unsecured notes affirmed at 'BBB-' - CNY650m senior unsecured notes affirmed at 'BBB-' - CHF110m senior unsecured notes affirmed at 'BBB-' - USD1.35bn senior unsecured notes affirmed at 'BBB-' - USD300m senior unsecured notes affirmed at 'BBB-' Indian Bank - Long-Term IDR affirmed at 'BB+'; Outlook Stable - Short-Term IDR affirmed at 'B' - Viability Rating affirmed at 'bb+' - Support Rating affirmed at '3' - Support Rating Floor affirmed at 'BB+' 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-' - USD3.25bn senior notes affirmed at 'BBB-' - USD1.5bn upper tier 2 bonds affirmed at 'B+' 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+' - EUR3bn MTN programme affirmed at 'BBB-' - USD1.6bn senior unsecured notes affirmed at 'BBB-' Contact: Primary Analyst Ambreesh Srivastava Senior Director +65 6796 7218 Fitch Ratings Singapore Pte Ltd. 6 Temasek Boulevard #35-04/05 Suntec Tower 4 Singapore Secondary Analyst Saswata Guha (SBI, Bank of Baroda, BOB NZ, IDBI Bank, ICICI Bank, Axis Bank) Director +91 22 4000 1741 Secondary Analyst Jobin Jacob (Punjab National Bank, Canara Bank, Indian Bank) Associate Director +91 22 4000 1773 Committee Chairperson Mark Young Managing Director +65 6796 7229 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. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014; 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014 and 'Evaluating Corporate Governance', dated 12 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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