The agency said move will strengthen the balance sheets of these banks apart from improving their core capital. It also expects an improvement in the overall performance of these lenders with the uptick in credit demand.
Earlier this week, the government said it would pump Rs 88,139 crore into 20 public sector banks before end-March. The outlook on Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank, Corporation Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Oriental Bank, Punjab & Sind Bank, Punjab National Bank, Syndicate Bank, Uco Bank, Union Bank and United Bank have been revised upwards to stable now.
The report, however is silent on SBI, which will get Rs 8,800 crore from the government this year.
"The revision in outlook is primarily driven by the recapitalisation, which will improve the financial risk profiles of these banks and also help them meet the Basel III capital norms, besides providing a cushion against expected rise in bad loan provisioning," Crisil said in a note on Friday.
The ratings on Basel III tier I bonds of nine PSBs including Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra and IDBI Bank among others, have also been reaffirmed, but their outlook has been retained as 'negative'.
The agency said it is evaluating the flexibility with the banks to set off any accumulated losses with their balance in share premium account and its implication on the availability of eligible reserves to service AT1 coupon payments.
"We will revisit our ratings on AT1 instruments once there is clarity," Crisil said.
The Rs 88,139-crore fund infusion is part of the Rs 2.11 lakh crore bank recapitalisation plan announced by the government last October, spread over FY18 and FY19. The finance ministry will raise Rs 80,000 crore through recapitalisation bonds and provide another Rs 8,139 crore from the Budget.
The agency believes that with the fund infusion, these banks are now adequately placed to meet Basel III capital norms and are also better prepared to absorb any hit from provisioning on stressed assets and also on account of migration to the Indian Accounting Standards.
The recapitalisation is dependent on the performance and reforms that each bank undertake and banks will have to adopt differentiated business strategy and exit from non-core businesses and focus on their core competencies, the government had said.
"Recapitalisation while emphasising government support, also persuades public sector banks to up the ante on responsible banking. The upshot of more accountability, governance and efficiencies is a structurally stronger banking system and improved investor sentiment towards them," said Krishnan Sitaraman, a senior director at Crisil.
The report said asset quality issues are peaking for these banks with incremental slippages to NPAs expected to taper in FY18 and FY19 as credit health of corporates are improving.
However, the resolution of large stressed accounts under the Insolvency and Bankruptcy Code and the potential haircuts thereof are expected to increase the provisioning burden and impact their earnings profile and capital position in the near-term, he warned.