S&P downgrades 7 PSBs on asset quality concerns

Worried by credit profile of Indian firms

Ratings of seven public sector banks including State Bank of India (SBI), Union Bank of India and Indian Overseas Bank were downgraded by rating agency Standard & Poor’s (S&P) in “anticipation” of their weak asset quality performance and cautioned that assets of five more banks could come under stress.

The overall non-performing assets (NPAs) of the banking industry could cross 10% by March 2013, up from 5% in March 2011, after including restructured loans and foreclosed assets in its definition of NPAs.

A silver lining in the cloud in the assessment that retail loans are performing well, partly because they are backed by mortgage and also due to tightening of underwriting norms for unsecured personal loans.

In a statement, S&P’s Rating Services said it has lowered the ratings on concerns ranging from weak asset quality, high credit costs and slippages on account of restructured loans.
In case of SBI and Union Bank of India, it said the asset quality will remain stressed this fiscal and next year as well, resulting in a downgrade from “adequate” to “moderate”.

In the case of Union Bank of India, its agricultural loans and infrastructure loans are facing multiple challenges, the agency noted. S&P revised the SACPs of SBI and UBI because it expect the banks' asset quality to remain weak and credit costs to stay high. "We have revised our risk position assessment on these banks to "moderate" from "adequate," as our criteria define those terms.

We expect SBI's and UBI's asset quality to remain stressed in the fiscal years ending March 31, 2013 and 2014, partly due to continued slippages in their restructured loan books." SBI's gross nonperforming loan (NPL) ratio of 5% (on a standalone basis) as of June 30, 2012, is the highest among the Indian banks, S&P said. On a standalone basis, the bank's mid-corporate (NPL: 9.3%) and agriculture (NPL: 9.8%) portfolios are particularly stressed, it said.

The agency said that banks are being impacted by the deteriorating credit profile of Indian companies during the past 12 months due to weak global and domestic demand, aided by policy inaction.

Domestic demand, in turn, has been hit by rising inflation and high interest rates. The cascading effect of a falling demand, coupled with absence of clarity on environmental clearances, land acquisition has led to a slowdown in capital spending, the agency said.
A slew of reforms announced by the Centre must be backed by implementation, according to S&P, to drive growth and improve the credit profile of Indian companies in the medium-to-long term.

However, the ratings on Indian Bank are constrained by ratings on India because the bank's SACP is higher than the 'BBB-' sovereign rating’, S&P said, pointing out that the agency had affirmed the ratings on all the banks to reflect its expectations that the ratings can withstand a stress test from a likely deterioration in asset quality. The rating firm also cited a very high likelihood of the government providing timely and sufficient extraordinary support to these banks in the event of financial distress.

India downgrade

India faces a one-in-three chance of a credit rating downgrade over the next 24 months, Standard & Poor's said, although a series of reform steps launched in September had slightly improved the country's prospects.

S&P's credit rating for India is BBB-, one notch above junk grade and the lowest investment rating in the BRICS grouping of big emerging economies. "A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow," the ratings agency said in a report dated Tuesday and released on Wednesday.

Bank hitlist
Bank of India — (BBB-/Negative/A-3)
IDBI Bank Ltd –– (foreign currency BBB-/Negative/A-3)
Indian Overseas Bank –– (BBB-/Negative/A-3)
Indian Bank –– (BBB-/Negative/A-3)
State Bank of India –– (BBB-/Negative/A-3)
Syndicate Bank –– (BBB-/Negative/A-3)
Union Bank of India –– (BBB-/Negative/A-3)