Fitch Downgrades PNB; Affirms Ratings of 9 Other Banks

Ratings agency Fitch has downgraded viability rating of state-owned Punjab National Bank by a
notch while affirming ratings on nine other banks, including SBI and ICICI Bank.

Besides, the agency has cut its India real GDP growth forecasts to 7.8 per cent for FY16 from 8 per cent, and to 8.1 per cent for FY17 from 8.3 per cent.

The Long-Term Issuer Default Ratings (IDR) on State Bank of India, Bank of Baroda, Bank of Baroda (New Zealand), Punjab National Bank (PNB), Canara Bank, IDBI Bank, ICICI Bank and
Axis Bank have been affirmed at 'BBB-'.

In case of Indian Bank, the agency has affirmed the IDR, which opine on an entity's relative vulnerability to default on financial obligations, at 'BB'.

"The outlook on the IDRs is stable," Fitch said in a statement.

The agency said PNB's Viability Rating (VR), which measures intrinsic creditworthiness, has been downgraded by one notch to 'bb' to reflect the growing risk to the bank's capital position from its mounting stock of stressed assets, which has risen at a faster rate than its capital replenishment.

"The downgrade also reflects Fitch's expectation that capital buffers are unlikely to improve significantly even though the state is likely to inject capital into the bank in the financial year ending 30 March 2016 (FY16), with the bank's large stressed assets stock potentially taking longer
to resolve than that of its peers," it said.

VRs measure the intrinsic creditworthiness of a financial institution, and reflect Fitch's opinion on the likelihood that the entity will fail.

Fitch further said that the outlook for Indian bank credit profiles in FY16 is more positive following the difficult year in FY15, when system-wide loans increased by 9.7 per cent, the slowest pace in a decade.

"There are, however, challenges from stressed sectors such as infrastructure and steel, high corporate leverage, and continued pressure on asset quality and capital," it added.

As per the agency, state-owned banks account for 85 per cent of the total capital shortfall that Indian banks face in meeting Basel III capital requirements, and they account for close to 90 per cent of the system's stressed assets.

On government's capital infusion of Rs 70,000 crore in public sector banks, Fitch said it should provide some support for the state-owned banks' ailing balance sheets, but may not be sufficient, depending on banks' credit growth expectations and persistent low equity valuations.

Indian banks' stressed asset ratio rose to 11.1 per cent in FY15 from 10 per cent in FY14. The same ratio for state-run banks rose to 13.5 per cent from 12 per cent in FY14, it noted.

The rating agency also said that government's seven-part plan to reform PSU banks could be a significant step towards increased transparency, better governance and greater accountability for the sector, provided government interference is minimised.