Rating agency Fitch has downgraded the viability ratings (VRs) of State Bank of India (SBI) and Bank of Baroda (BoB), citing “their weakened intrinsic risk profile due to the negative effect of persistently poor asset quality and earnings on their capital position”.
Fitch downgraded the VRs of SBI and BoB by one-notch to ‘BB+’ and ‘BB’, respectively. The banks’ core capital buffers also appear more vulnerable to moderate shocks, it said. The agency, which has a negative sector outlook on the domestic banks, however, said the new NPA framework has accelerated bad-loan recognition, and should improve the health over the long term.
However, Fitch affirmed the ‘BBB’ long-term issuer default ratings of SBI and BoB along with that of Canara Bank and Bank of India (BoI). The agency has also retained the stable outlook on these lenders. “However, heavy losses and capital erosion reinforces our belief that sector core capitalisation will remain weak unless authorities provide more capital than the budgeted $11 billion,” it added. As many as 19 out of 21 state-run banks have reported losses in FY18, cumulatively wiping out almost all of the $ 13-billion capital injections during the year. Eleven of them reported common equity Tier 1 (CET1) ratios that fell short of the 8 per cent requirement for Basel III capital migration.
“We expect internal capital generation to remain weak, although many state banks should be able to recover from losses in FY19. Credit cost, which rose to 4.3 per cent on average at state-owned banks from 2.5 per cent in FY17 are likely to moderate, but ageing provisions, slippage from watchlist portfolios and the poor growth outlook limits the upside,” the agency said. The long-term ratings of SBI, BoB, Canara Bank and BoI are driven by their support ratings of ‘2’ and support rating floors of ‘BBB-‘, Fitch said, adding the support ratings and support rating floors reflect its expectation that the banks are likely to receive extraordinary government support due to their high systemic importance and the government ownership.