The ratings agency has estimated that Indian banks will need USD 65 billion as additional capital to meet Basel III requirements by 2019 with state banks requiring more than 90 percent.
Fitch Ratings has a negative sector outlook on Indian banks due to weak capitalisation and lower loan growth estimates impacting profitability.
"This is based on the assessment that the sector’s weak core capitalisation continues to pose downside risks to standalone credit profiles amid expectations of continued poor loan growth, weak earnings, volatile asset quality and elevated credit costs. In addition, Basel III capital migration has entered its final phase with capital requirements at their most onerous," Fitch said in a note released on Thursday.
The ratings agency has estimated that Indian banks will need USD 65 billion (over Rs 4 lakh crore) as additional capital to meet Basel III requirements by 2019 with state banks requiring more than 90 percent. Their common equity Tier 1 (CET1) ratio of 8.7 percent is weak and eight out of 14 banks have a CET1 + capital conservation buffer (CCB) below the minimum 8 percent required by the year-ending March 2019 (FY19). Core equity is about two-thirds of the requirement but the government has committed to invest only about USD 3 billion (Rs 20,000 crore) in fresh equity over FY18-FY19.
Some state banks are planning to raise fresh equity from capital markets in FY18 (similar to SBI) but it will not be easy due to low investor confidence and bleak earnings prospects.
The banks' gross NPA (non-performing assets) ratio touched 9.7 percent in FY17 – a jump of close to 200 basis points (bps) in comparison with the 50 bps increase in the stressed asset ratio (12 percent). Slippages moderated for many state banks although they remained at high levels for some.
State banks remain significantly weaker as their NPA ratio is more than double that of private sector banks.
Fitch believes the sector’s asset-quality outlook could remain challenging in the next 12 months due to incipient stress in the power sector and concerns about farm loan waivers and SMEs (post demonetisation). "Satisfactory resolution of large NPA accounts is underway under the central bank’s oversight and can have a positive effect on the NPA stock. Provisions are likely to rise in the interim as NPA cover is moderate at 40-50 percent," the note said.
The agency expects earnings to remain subdued in the near term and that banks will find it difficult to manage elevated credit cost pressures as income generation will suffer due to the income loss from NPAs and the weak growth outlook.
“Treasury gains and the sale of non-core assets may provide support but state banks are unlikely to see any meaningful revival in earnings in FY18 as they reported consecutive negative return on assets (ROA) in FY17,” Fitch said.While banks’ loan growth slumped to 4.4 percent in FY17, the lowest in several decades, it is further likely to remain subdued for the foreseeable near term.