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Cautioning that more loans of highly leveraged corporates are likely to turn into non-performing assets over the next few quarters, rating firm Crisil on Thursday said that weak assets of public sector banks are set to balloon to Rs 7,10,000 crore — which is 11.3 per cent of the loan book — by March 2017. Crisil has downgraded its ratings on the debt instruments of eight PSU banks and revised its outlook on five others to ‘Negative’ from ‘Stable’.
According to Crisil, significant stress in the corporate loan book of PSU banks is expected to result in their weak assets rising from around Rs 400,000 crore as on March 31, 2015 (7.2 per cent of loan book). Over the next few quarters, it expects slippages to NPAs to remain high driven by stretched cash flows of highly leveraged firms (mainly in the vulnerable sectors such as infrastructure, metals and real estate), continued proactive recognition of stressed assets by banks, and limited ability of banks in the current environment to recover from exposures to large corporates that have slipped into NPAs.
The latest downgrade is in addition to another rating downgrade and an outlook revision to ‘Negative’ on two public sector banks (PSBs) over the past month. The ratings on instruments of ten other CRISIL-rated PSU banks have been reaffirmed wherein four of them carry a “Negative” outlook. The rating on one bank has been placed on “Watch negative”. The eight PSU banks downgraded by Crisil are: Bank of India, Central Bank, Corporation Bank, Dena Bank, IDBI Bank, IOB, Syndicate Bank and UCO Bank. The five banks which are given ‘Negative’ outlook included Andhra Bank, Bank of Baroda, Canara Bank and PNB.
The actions are driven by the expectation that the asset quality problems being faced by PSBs will remain acute and continue through most of the next fiscal. “The resultant impact on profitability and capitalisation can further dent the credit profiles over the medium term,” it said.
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Further, the earnings profile of most PSU banks has deteriorated with many expected to report a full-year net loss this fiscal. With the banking system having to migrate to the marginal cost of funds-based lending rate, or MCLR, regime from April 1, 2016, and the proportion of zero income-generating bad assets in the loan book of PSBs rising, net interest margin will come under fresh pressure in the near-term, it said. This, coupled with loan loss provisioning at a number of PSU banks surpassing pre-provisioning profit, due to increased slippages and a rising inventory of ageing NPAs, could result in many PSU banks reporting a loss even for the next fiscal.
“Given that net worth coverage for un-provided weak assets is very low at 1.5 times, PSU banks will have to raise a substantial amount of capital to maintain sufficient cushion against asset-side risks and to meet the Basel III capital requirements,” Crisil said.
Despite the recent relaxation of capital regulations by the RBI for computing capital ratios and expectation of lower growth up to 2019, equity capital support of Rs 70,000 crore committed by the government in the next four years under the Indradhanush plan will not be sufficient. “This is because the tier 1 capital requirement for PSU banks, up to 2019 has increased from our earlier estimate largely on account of sharp decline in their profitability,” it said.
Given that capital raising through the non-government route will be a challenge for PSBs because of their weak financial performance and in the absence of any commitment from the government, Crisil has lowered its floor rating for corporate credit rating for PSBs to ‘Crisil A+’ from the current ‘Crisil AA-’. Most ratings, however, continue to remain in the ‘AA’ category or higher.
