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07 Jun 2018
Singapore, June 07, 2018 -- Moody's Investors Service expects the Indian government's
(rated Baa2 stable by Moody's) recapitalization plan will still
broadly resolve the regulatory capital needs of the country's 21
public sector banks (PSBs) and help augment the banks' loan-loss
buffers, but will be insufficient to support credit growth.
Moody's Indian affiliate, ICRA Limited, says that with the
accelerated recognition of stressed assets during FY2018, the asset
quality problems of the banking sector peaked in March 2018.
"The PSBs' capital shortfalls are larger than the scale that
the government had expected when it announced the recapitalization in
October 2017, mainly because the banks have failed to raise additional
capital from the market and it may be difficult for them to raise more
capital given the substantial decline in their share prices since the
beginning of 2018," says Alka Anbarasu, a Moody's
Vice President and Senior Credit Officer.
"Moreover, the capacity of these 21 banks to generate internal
capital has deteriorated because of their weak financial performance and
a sharp increase in government bond yields, which hurt their investment
income," says Anbarasu.
Furthermore, the discovery of INR14.4 billion of fraudulent
transactions at Punjab National Bank (rated Ba1 stable, b1 by Moody's)
has substantially increased the capital needs of that bank.
Under its recapitalization plan, the government plans to infuse
INR650 billion into the PSBs in fiscal 2019, following the INR900
billion infused in fiscal 2018.
According to Moody's scenario analysis, after the budgeted
capital infusion of INR650 billion, all PSBs will have Common Equity
Tier 1 (CET1) ratios exceeding the 8% minimum, by March 2019.
However, this development assumes overall credit growth for the
PSBs of a modest 6%-8% in the next year, with
the relatively stronger banks having room to grow, but the weaker
institutions continuing to shrink their balance sheets to conserve capital.
As such, Moody's believes a key variable to the quantum of
capital infusions is the government's own policy decision on whether
it wants a higher level of credit growth in the system, given the
potential macro-economic implications.
In addition, as per Moody's assumption that the banks allocate
the bulk of their operating profits to loan loss reserves, the capitalization
plan will support a provisions coverage ratio of about 60-62%,
excluding general provisions. This level of provisioning coverage
will be a significant improvement compared to the average coverage of
about 49% (excluding general provisions) in fiscal 2018.
Nevertheless, the sufficiency of the provisioning will depend on
the write-downs the banks need to take under the Reserve Bank of
India's (RBI) new rules for accelerated bad debt resolution.
In particular, Moody's expects write-downs related
to the resolution of non-performing loans (NPLs) in the power and
construction sectors could be larger than the outcome of the initial resolution
of a few steel sector NPLs.
Also when unveiling its capital support plan in October 2017, the
government had anticipated that the banks would raise about INR580 billion
from the equity market. However, they have so far raised
only about INR100 billion.
Moody's believes it may be difficult for them to raise significantly
more, after consideration of the substantial decline in their share
prices since the beginning of 2018, which indicates weak investor
demand for Indian bank equities. The share prices of the PSBs has
declined by 19% since beginning of the year, compared to
a 3% increase in the Bombay stock market index.
According to Moody's, a key negative credit implication of
these developments is that the capital allocations for relatively better
run PSBs -- like State Bank of India (rated Baa2 stable,
ba1 by Moody's), Bank of Baroda (rated Baa3 stable,
ba2 by Moody's), Canara Bank (rated Baa3 stable, ba3
by Moody's) and Syndicate Bank (rated Baa3 stable, ba3 by
Moody's) -- will decrease as the capital needs of
the other banks have increased.
Although, these banks already have capital ratios exceeding minimum
requirements, Moody's further expects them to generate capital
internally. Nevertheless, lower capital allocations will
leave them with less-than-expected capital to use for growth.
On the other hand, Moody's expects the remaining group of
relatively weaker banks will still meet their Basel III requirements as
the government is committed to helping the banks achieve their regulatory
Moody's Indian affiliate ICRA says that, with the accelerated recognition
of stressed assets during FY2018, the asset quality problems of
the banks peaked in March 2018 and further additions to gross non-performing
assets (GNPAs) will decline with fresh slippages falling to around 3.0%
during FY2019 compared to 7.1% during FY2018 and 5.5%
"The regulatory push for the recognition and resolution of stressed
assets stepped up further during Q4FY2018 as the RBI announced the revised
framework for the resolution of stressed assets during February 2018,"
says Karthik Srinivasan, Senior Vice President, Group Head
- Financial Sector Ratings, ICRA Limited.
"With the revised framework, all the regulatory forbearances
were done away with and the threshold for the implementation of the resolution
of stressed assets was further enhanced to a single day overdue status
of the borrower," says Srinivasan.
ICRA believes that with these changes, the recognition of stressed
assets further accelerated with fresh slippages for the sector being the
highest ever for a quarter at INR2.28 trillion during Q4 FY2018
(a fresh NPA generation rate of 12%), with 85% from
With limited improvements in recoveries and upgrades, GNPAs surged
to INR10.2 trillion (11.8%) on March 31, 2018
compared to INR7.65 trillion (9.5%) on March 31,
The sharp rise in fresh slippages, ageing of earlier NPAs because
of limited resolution, and higher provisioning requirements on certain
accounts referred for resolution under the insolvency and bankruptcy code
(IBC) 2016 pushed up credit provisions for the sector, says ICRA.
This provisioning rose to INR3.17 trillion (4.0%
of advances) during FY2018 as compared to INR2.03 trillion (2.7%)
during FY2017, far surpassing the operating profits of the banks.
The net losses for the sector increased to INR463 billion during FY2018
compared to net profit of INR350 billion during FY2017.
With the likely resolution of large stressed borrowers under the insolvency
and bankruptcy code (IBC) 2016 and proposed resolution under the revised
framework for resolution of stressed assets, ICRA expects the recoveries
and upgrades to surpass the fresh addition to GNPAs during FY2019.
This is expected in turn to result in a decline in the GNPAs and net NPAs
to below 9% and 5% respectively by March 2019.
With recognition of the stress and higher provisioning, the provisioning
cover against the NPAs increased to 49.4% in March 2018
compared to 44.3% in March 2017. Incrementally,
assuming provision cover of 60-65% on the NPAs, the
credit provisions are expected to decline to ~INR1.4-1.9
trillion (1.6-2.1% of advances) during FY2019.
Though the provisions are expected to decline, ICRA believes these
are expected to surpass the operating profits of the PSBs, which
will result in continued losses for them, even as the profitability
of the private banks improves during FY2019.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
MD - Banking
Financial Institutions Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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