Moody’s: Indian PSU banks’ accelerated recognition of NPLs will require larger government capital infusion -Full Text

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)