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Announcement:

Moody's changes India banking system outlook to negative

Global Credit Research - 09 Nov 2011

Singapore, November 09, 2011 -- Moody's Investors Service has changed its outlook for India's banking system to negative from stable due to concerns that an increasingly challenging operating environment will adversely affect asset quality, capitalization, and profitability.

"India's economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates. At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing program of the Indian government, which could drain funds away from the private credit market," says Vineet Gupta, a Moody's Vice President and Senior Analyst.

Gupta was speaking on the release of Moody's latest outlook for the Indian banking system, and which he authored along with other senior Moody's analysts. The outlook applies for the next 12-18 months.

Moody's rates 15 commercial banks in India, which together account for about 66% of the system's total assets as of March 2011. The system is dominated by public-sector banks, which account for around 75% of the market in asset terms. The weighted average stand-alone banking financial strength rating (BFSR) is D+, and mapping to a Baseline Credit Assessment of Baa3. The average long-term deposit rating is Baa2/Prime-2.

"With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013," says Gupta.

"Meanwhile, with capitalization, we expect loan growth to be a strain on the banks' capital over the horizon of this outlook. As monetary conditions tighten and economic activities slow, we expect bank loan growth to fall to 16%-18% in FY2012 and FY2013, from 21% in FY2011," says Gupta.

"And with profitability, we expect it to come under pressure due to lower interest margins as deposit rates re-price and get a further push from the latest liberalization on savings deposit rates," says Gupta.

The new Moody's report further concludes that bank ratings may come under downward pressure, although currently, the negative outlook on the banking system contrasts with the stable outlook assigned to the bank financial strength ratings of 14 of the 15 rated banks.

For those banks with weaker capital ratios on average and higher asset quality pressures relative their individual rating levels, their standalone ratings are likely to come under pressure as underscored by Moody's downgrade of the State Bank of India's BFSR to D+/Stable/Baa3 from C-/Stable/Baa2 on 4 October 2011.

But, on the positive side, Moody's recognizes that Indian banks' stable customer deposit base and high level of government securities holdings provide them with a resilient funding and liquidity profile that buffer them against destabilizing shocks.

Moody's also expects the government to remain committed towards providing support to both public and private banks. Such potential support translates to an average one-notch uplift to the banks' debt and deposit ratings to Baa2, compared with their standalone base line credit assessment of Baa3.

Banking system outlook publications represent Moody's view on the broad operating environment in which banks of a given system operate and, more specifically, on the influence that macroeconomic, competitive, and regulatory trends may have on banks' asset quality and capital and, ultimately, on their funding and profitability.

As such, a "stable" outlook is one that implies an environment that favors sustainable profitability and limited volatility for a period of at least four to six quarters.

A "negative" outlook is one that is characterized by volatility and uncertain conditions.

A "positive" outlook is one in which banks are expected to rest on solid ground for the duration of the time horizon -- 12-18 months --- and in which banks are expected to grow steadily as a result of a favorable environment during that period.

The report is titled Banking System Outlook: India. It can be found at www.moodys.com

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Vineet Gupta
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's changes India banking system outlook to negative
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