After public sector banks reported disappointing numbers for Q3FY16, rating agencies have been quick to lower their credit outlook for the universe. In the last three weeks, credit outlook of at least four PSBs have been revised downward by rating agencies.
On Friday, ICRA revised down its outlook for Rs 1,225-crore worth tier II bonds of United Bank of India, citing pressure on earnings and solvency of the bank due to “deterioration in asset quality as well as limited visibility on capital availability to fully support credit growth while meeting regulatory minimum requirement”.
Even as the government’s majority ownership in UBI (82%) and the bank’s well established franchise in eastern and north-eastern regions are seen as comforting factors, ICRA said the lender’s low earnings were regarded as a credit concern also in light of low tier-I capital.
ICRA noted that for the period of FY16-FY19, UBI’s capital requirements are close to 190-260% in relation to its market capitalisation. “Given the current stance of GoI on providing equity, UBI will have to mobilize significant equity/tier I from non-government sources,” ICRA said.
For three months to December 2016, the net profit of UBI dropped by 59% Y-o-Y to Rs Rs 17 crore while its gross non-performing assets (GNPA) increased from 8.9% as on September 2015 to 9.57%.
In recent past, various rating agencies raised concerns that the credit profile of Indian PSBs were at risk of downgrades amid rising capital requirements of these banks.
On Tuesday, Standard & Poor’s said given that the upfront capital required by PSBs for bad loans provisions is likely to shoot up, the banks are likely to be exposed to downgrades.
The rating agency noted that many public sector banks could face deterioration in their standalone credit profiles (SACPs) and downgrades if they are unable to raise the requisite capital over the next few months. They could then breach the regulatory minimum capital requirement or their risk-adjusted capital ratio may deteriorate.
On Friday, Fitch said significant quarterly losses reported at several large public banks underscored long-standing balance sheet and capital risks stemming from legacy issues pertaining to poor asset quality and weak provisioning.
It noted that estimated capital need of $140 billion for the system may need to be reassessed, given some of the losses.
Fitch has long assessed India’s banking system on a stressed-asset basis rather than NPLs (non-performing loans) and factored in under-provisioning for ratings of public sector banks.
Fitch is of the view that RBI’s intention to clean up bank books by March 2017 as a pre-requisite to kick-start credit growth could help revive investor confidence in PSBs. “But the suddenness and speed of the provisioning in the second half of FY16 highlights how long it has taken to address poor balance-sheets. It also raises questions over the pace and implementation of bank recapitalisation and reforms, especially when central bank intervention is required in identification of bad assets,” it added.