Fitch takes rating action on Indian banks

Fitch Ratings today downgraded Indian Bank's Long-Term (LT) Issuer Default Rating (IDR) to 'BB+' from 'BBB-' and its Viability Rating (VR) to 'bb+' from 'bbb-'. Simultaneously, Fitch has downgraded Punjab National Bank's (PNB) and Bank of Baroda's (BOB) Viability Rating (VR) by one notch to 'bb+' while affirming their long term (LT) Issuer Default Rating (IDRs) at 'BBB-'.

The agency has also affirmed the LT IDRs of State Bank of India (SBI), Canara Bank (Canara), IDBI Bank (IDBI), Bank of Baroda New Zealand (BOB NZ), ICICI Bank (ICICI) and Axis Bank (Axis) at 'BBB-', and the VRs of SBI, ICICI and Axis at 'bbb-', Canara at 'bb+' and IDBI at 'bb'.
The LT IDRs of SBI, BOB, PNB, Canara, IDBI and ICICI are at their Support Rating Floors (SRF), which is driven by their systemic importance as reflected in their support rating (SR) of '2'. The IDRs of SBI, ICICI and Axis are also driven by their stand-alone credit strength, which in the case of SBI and ICICI is currently at the same level as their SRF; Axis has a lower SRF of 'BB+' and SR of '3'. Also read: Bank stocks melt on RBI's redoubled war against inflation
Following the rating action, the Outlook on the IDRs for the nine banks is Stable.
The rating actions follows a review of the Indian banking sector against the backdrop of sharp deceleration in economic growth and Fitch's expectation of a further deterioration in asset quality. The economic slowdown is likely to be more protracted than Fitch initially expected because of the currency volatility in recent months and persistent high inflation.
Fitch expects that asset quality at Indian banks (particularly state-owned ones) will worsen, resulting in a larger amount of stressed assets than initially forecast and the amount would peak only in FY15 (fiscal year ending March 2015) rather than this current financial year.
Given the build-up of stressed assets (NPL + restructured loans) at Indian banks (10% of loans at end-June 2013, with NPLs at 3.9% of loans), the equity buffer at many state-owned banks is looking increasingly stretched compared with those of their private peers, despite regular capital injections from the government.
Pressures are also building on internal capital generation as revenue growth slows due to lower loan growth, squeezed margins from higher funding costs and higher provisioning requirements. The outlook for the agriculture sector has improved following good monsoons, which should provide some cushion to the expected decline in growth.
Fitch's stress tests show that most state-owned banks are more sensitive to a further deceleration in economic growth due to their greater exposure to the infrastructure and cyclical sectors as well as their greater proportion of foreign-currency lending.
Private banks, though not unaffected, have showed superior performance, with earnings and capital buffers at levels significantly higher than state-owned ones.