India Ratings and Research (Ind-Ra) has maintained a stable outlook on large private sector banks and two large public sector banks (PSBs) - State Bank of India (‘IND AAA’/Stable) and Bank of Baroda (‘IND AAA’/Stable). The agency has retained a negative outlook for the remaining PSBs for Q4FY19-FY20. Most large private banks and the two large PSBs mentioned above are adequately poised to benefit from growth opportunities over FY19-FY20 and gain market share at a faster pace. In FY20, all the banks on which we have a stable outlook might see moderate write-backs of provisions on corporate assets, depending on the pace of resolutions.

The agency has retained its negative outlook on mid-sized and smaller PSBs with weak capitalisation, relatively lower provisions coverage for identified stressed assets and a larger stock of unrecognised assets across non-corporate segments. Despite capital infusion by the government, some banks in this category may see muted credit growth as they may reach capitalisation levels that are barely higher than the already diluted regulatory requirements. Further, the proportion of reversals in corporate provisions would be low compared to the aforementioned banks, indicating capital erosion for some of them even in FY20. The agency would continue to revaluate its opinion on the support stance of the GoI towards the PSBs on an ongoing basis. 

Stressed Corporate Assets Have Peaked; Incremental Provisions Lower in 2HFY19 and FY20: In 1HFY19, the stressed corporate exposure (interest coverage ratio < 1.5x) as a percentage of total bank credit declined to 19.3% from about 20-21% over FY16-FY18, mainly on account of credit growth in the non-corporate segments. The top 40 assets under the NCLT resolution regime are worth INR4,500 billion and are provided to the extent of 70-75%. Over FY19 and FY20, the credit costs from stressed corporate assets would depend on ageing and resolution/liquidation completion, if any. The cap on credit costs shall be established by ageing and would be around 4.4%, spread over FY19 and FY20. Ind-Ra’s bottom-up assessment for loss given default on stressed corporates indicates a best case (floor) credit cost of about 2% spread over the same period. The actual credit cost is expected to be in the abovementioned range, depending on the pace of resolution, especially of the larger assets. 

The analysis excludes non-banking financial institutions (NBFCs). The agency has a negative outlook on NBFCs in the wholesale lending, large ticket housing and loan against property segments. While NBFCs may face stress because of the loan portfolios, it is the non-availability of adequate liquidity or adverse market conditions that may play a larger role in precipitating stress, which could eventually lead to defaults. 

Stress Building Up in Smaller Ticket Commercial Loans; Retail Loan Growth May Taper, Asset Quality Trend May Not Replicate Historical Trends: 3.9% of stressed corporate exposure (of the 19.3% stressed corporate exposure referred above) is unrecognised (are standard in the banks’ books) and part of it may slip over 2HFY19 and FY20. In non-corporate segments, the banks, especially the PSBs, have seen a substantial increase in the non-performing assets (in terms of percentage). Given that the RBI’s forbearance is available in some of these segments in terms of recognition, a part of the incremental credit costs on such accounts may be recognised in Q4FY19-FY20, while incremental stress in micro, small and medium enterprises would show up in FY21, unless the economy picks up. Also, the CAGR of 17.8% seen in retail credit over FY15-FY18 is not fully supported by the low growth in employment as well as wages, especially in the services sector, and the segment needs continuous monitoring.  

Government Capital Allocation Should Support Moderate Growth
: Ind-Ra estimates the quantum of government’s capital infusion (INR1,940 billion) in FY18 and FY19 to be around 33% of PSBs’ equity base at 1HFY19. This would largely cover the provisioning costs, especially on corporate stressed assets, and meet the minimum Basel III regulatory requirements at end-March 2020. The agency estimates PSBs would require incremental capital of about INR660 billion through Q4FY19-FY20 for credit expansion of 10-11% in FY19 and FY20 each. The aforementioned capital infusion is not adequate to cover the impact of Ind-AS (if applicable), which could be substantial, as per the agency’s estimates. Equity infusion by the GoI will not increase the free reserves available to service the AT1 bonds, which will keep AT1 issuances subdued. However, the agency expects the PSBs that are in a position to grow their advances to issue Tier 2 capital of about INR100-INR150 billion. 

Stress Test Indicates Select PSBs Could See Profitability in FY20: Ind-Ra’s stress tests indicate that, in the absence of Ind-AS, the credit costs of some PSBs could be lower than their pre-provisioning operating profits on account of ageing and fresh slippages. As a result, these banks could witness profitability in FY20. However, volatility resulting from short-term funding gap pressures on some PSBs could lead to higher cost of funds, and movements in G-sec rates could leave the banks more exposed to market risk. 

Competition for Deposits Could Intensify: Ind-Ra believes competition for deposits will intensify in FY20, as borrowings for banks remains high (growth of 27.3% yoy in FY18 - private banks up 42.2% yoy and PSBs up 17.3% yoy), while system deposit growth remains muted at 6%. Systemic credit growth is likely to pick up in FY20 to about 13% yoy, and private banks would continue to see higher growth in the same compared to PSBs; consequently, private banks are likely to solicit deposits even at higher rates. This could also to lead to a divergence in the marginal cost of funds-based lending rates of private banks and PSBs.

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Analyst Names

  • Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Ruhi Pabari

    Analyst
    +91 22 40001757

    Karan Gupta

    Associate Director
    +91 22 40001744

    Prakash Agarwal

    Director and Head Financial Institutions
    +91 22 40001753

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121