Fitch downgrades Canara Bank, reaffirms SBI

Fitch Ratings on Thursday downgraded Canara's Viability Rating (VR) by one notch to 'bb+' while affirming that of SBI, PNB and BOB at 'bbb-' or Long-Term Issuer Default Rating (IDR).

The Outlook on the IDRs is Negative, which mirrors India's rating Outlook, Fitch Ratings said in a note on Thursday.

Fitch said that Canara Bank's VR downgrade reflects structural challenges in the bank's funding and asset quality, which are unlikely to be addressed without near-term implications on growth and, potentially, on market share. “In particular, Canara has higher risk concentration to the troubled infrastructure sector including state electricity boards (SEB) and a weaker funding profile,” Fiitch said in its note.

Canara has lower overall profitability relative to the other banks due to weaker margins, which are a function of its higher-cost funding profile, Fitch said.

The agency noted that the IDRs of the four government banks have been driven by a high probability of extraordinary government support if required given their high systemic importance. These banks account for close to 32 per cent of the system assets and deposits backed by a pan-India franchise of over 27,000 branches as of the financial year ended March 2012 (over 33,000, including SBI's five associate banks).

“In general, government banks have large concentrations in the infrastructure sector, where industry challenges including fuel supply issues, low tariffs, and high interest cost are leading to large-scale restructuring in areas such as SEBs, power projects and aviation. Fitch believes that the reported non-performing loans (NPLs) do not completely reflect these risks as their calculation does not include restructured loans,” the note said.

It added that the potential for further loan restructuring is highest for Canara and is a negative for its asset quality given its weak specific provision cover of only 15 per cent.
Bank of Baroda was also pointed out as vulnerable to more loan restructuring, though this is mitigated by its asset quality track record and performance -- the strongest among large government banks in the last five years, Fitch said.

SBI, despite its high NPLs, has seen a consistent increase in specific provision cover in the last four years and has the lowest proportion of restructured assets relative to peers. Fitch estimates that stressed assets (NPLs plus restructured loans) ratios for SBI and BOB stood at 6.7 per cent and 6.4 per cent for the first half of fiscal 2013 despite wide divergence in their reported NPLs of 5.2 per cent and 2 per cent respectively. The stressed assets ratio was the weakest for PNB at 11.7 per cent.

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