Fitch downgrades Indian banks
Credit rating of SBI, PNB, ICICI, BoB and others turns negative
Fitch Ratings on Wednesday revised the credit rating outlook of State Bank of India, Punjab National Bank and nine other financial entities from ‘stable’ to ‘negative’, while affirming the rating.
The list of other downgraded entities include four government banks (including an international banking subsidiary of a government bank), two private banks, two wholly owned government institutions and one infrastructure finance company.
They include Bank of Baroda (BoB) and its international banking subsidiary in New Zealand known as BOBNZ, Canara Bank, IDBI Bank, Axis Bank, ICICI Bank, Export-Import Bank of India (Exim Bank), Housing and Urban Development Corporation (HUDCO) and Infrastructure Development Finance Company (IDFC).
The action by Fitch was consequent to the revision made earlier this week of India’s outlook to negative.
In a statement Fitch said: “The outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counterparties and holdings of domestic sovereign debt.”
Besides two wholly owned government institutions — Exim Bank and HUDCO have also been similarly downgraded. The outlook of IDFC and Indian Railway Finance Corporation outlook has also become negative.
Fitch, however, maintained that banks continue to have reasonable customer deposit base, domestic franchises and adequate capital, while the non-banking financial entities (NBFCs) lack the funding advantage now which puts them more at risk during times of increased market volatility.
Analysts are of the view that the cut in the rating outlook may raise the cost of overseas borrowings for such institutions. The rating agency also said sovereign support for both the large banks and ‘policy-type institutions’ is expected to remain strong, with the former benefiting from their large share of system assets and deposits and the latter from their association with the government.
It may be noted, Fitch, on last Monday, lowered India’s credit rating outlook to negative, citing corruption, inadequate reforms, high inflation and slow growth. As such, India faces an “awkward combination” of slow growth and elevated inflation, Fitch had said, adding that the country “also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms”.
No impact on stocks
Since share price of all banks downgraded by Fitch gained in value on Wednesday, analysts point out that the downgrading will have no impact.
Prior to this, Moody’s had in last month lowered the standalone ratings of India and leading financial institutions to D+ (D plus) from earlier C- (C minus). Should the sovereign long-term IDR be downgraded, the banks with Viability Ratings (VR) of ‘bbb-’ would also be affected, given the previously mentioned linkages.
In April this year 2012, Standard and Poor’s (S&P) lowered India’s rating outlook to negative from stable. It also warned on June 11 that the country may be the first in the BRIC grouping to falter and its sovereign credit rating may slip below investment grade.