Moody’s
Investors Service says that the credit profiles of Indian public sector
banks will worsen, if the government does not revise upwards its capital
infusion plan for the banks in the Indian upcoming budget to be
presented on 29 February 2016.
“While
the reported NPLs of the 11 public sector banks that we rate registered
a significant 0.9%-4.1% increase in the most recent quarter ended 31
December 2015, Moody’s view of the true underlying asset quality of
these banks has remain unchanged, “says Srikanth Vadlamani, a Moody’s
Vice President and Senior Credit Officer.
Vadlamani
explains that the increase in non-performing loans (NPLs) was because
of the recognition of stress in a few large accounts, as well as
slippages from restructured accounts. Both of these trends have been
factored into Moody’s view on the banks’ asset quality.
The
banks’ enhanced NPL recognition in the quarter ended 31 December 2015
was spurred by the Reserve Bank of India’s directive to recognize
specific accounts as NPLs. Despite this push, some large corporate
exposures with weak financial metrics could continue to remain as
standard assets on the banks’ books.
In
line with Moody’s view on the banks’ asset quality, Moody’s estimates
that the 11 public sector banks’ external capital requirements remain
unchanged, at INR1.45 trillion for the four fiscal years ending 31 March
2016 to 31 March 2019 (FY2016-FY2019).
The
estimate factors in the full extent of the asset quality issues that
the banks are facing, and not just the extent of impaired loans that
have been recognized so far. However, there would be a significant front
ending of capital requirements now.
“The
front-ending of NPL recognition and provisioning results in a
corresponding need to boost capital levels,” adds Vadlamani.
“Consequently, unless the government revises upwards its capital
infusion plan for the banks in its upcoming budget, the banks will see
negative pressure on their credit profiles.”
Moody’s
analysis is contained in its just-released report titled “Indian
Banking Sector: Accelerated NPL Recognition Requires Front-Ending of
External Capital Injections,” and is authored by Vadlamani.
Moody’s
report points out that public sector banks are unlikely to gain access
to the capital markets for equity capital in the near term given their
low valuations. The banks will therefore have to turn to the government
for accelerated capital injections over the next 18 months.
Moody’s
explains that in 2015, the government announced a four-year capital
infusion roadmap for public sector banks. It proposed to inject INR700
billion during FY2016-FY2019, of which, INR500 billion would be injected
in the first two years.
At
the same time, the capital infusion roadmap indicated that the overall
capital requirements of the banks over the four-year period would total
INR1.85 trillion.
Implicit
in the government’s plan for the banks was the authorities’
expectations that these banks would be able to tap into the capital
markets for their remaining capital requirements, although at a later
date, when the capital raising environment is more conducive.
However, with heightened capital requirements in the near term, the key assumptions of this roadmap may no longer be valid.
The 11 public sector banks in India that Moody’s rates comprise:
1) State Bank of India (Baa3, ba1, Positive)
2) Bank of Baroda (Baa3, ba2, Positive)
3) Bank of India (Baa3, ba3, Positive)
4) Punjab National Bank (Baa3, ba3, Positive)
5) Canara Bank (Baa3, ba3, Positive)
6) Union Bank of India (Baa3, ba3, Positive)
7) IDBI Bank Ltd (Baa3, b1, Stable)
8) Central Bank of India (Ba1, b3, Stable)
9) Indian Overseas Bank (Ba1, b3, Negative)
10) Syndicate Bank (Baa3, ba2, Positive)
11) Oriental Bank of Commerce (Baa3, ba3, Positive)
