Rating agency Fitch on Tuesday retained a negative sector outlook for the banking system citing fragile standalone position of public sector banks.
According to Fitch, the outlook suggests there may be more downside risks for their viability ratings (VR) since their asset quality has been deteriorating and they need larger capital injections. “Private sector banks have better earnings and capital buffers despite rising pressure on the asset quality,” it said.
The agency added that capital requirement of banks are set to rise significantly as the Basel III phase-in approaches its advanced stages. Fitch estimates banks will require around $90 billion in new total capital by the financial year ending March 2019 to meet Basel III standards.
Moreover, Fitch believes that it will be very difficult for the domestic market to support the significant AT1 requirement without broadening the investor base. “Domestic AT1 issuance has risen in the last few months, but overseas activity has been absent since SBI’s debut AT1 issuance in September 2016,” it explained.
On demonetisation, the agency said consumers have not had the cash needed to complete purchases, and there have been reports of supply chains being disrupted and farmers unable to buy seeds and fertiliser for the sowing season. This, it said, could impact the GDP growth and the longer the disruption continues, the greater will be its impact. “But we will already need to revise down our forecasts to reflect what will almost certainly be a weak 4Q16.”