The outlook on Indian banks will stay negative due to weak core capitalisation, expectation of elevated credit costs, and poor earnings, Fitch Ratings said on Monday.
“This poses (a) downside risk for banks’ standalone credit profiles unless capital is replenished – be it through the State, capital markets, or asset sales,” it said in a new report.
While the viability ratings of public sector banks (PSBs) are at greater risk, some private sector banks have also witnessed pressure due to significant deterioration in the last 12-18 months, the Fitch report said.
The report comes at a time when most banks have released their first quarter results, revealing continued losses and bad assets. Private sector lender ICICI Bank posted its first-ever quarterly loss of ₹120 crore in the April-June quarter, while State Bank of India registered a net loss of ₹4,876 crore in the same period.
Fitch said banks need about $40-$55 billion in capital to meet Basel-III capital standards by the end of the fiscal and also to sustain credit growth, while meeting a loan-loss cover of 65-75 per cent. The Centre’s plan to inject $1.7-billion of fresh capital in five State banks will provide a short-term reprieve, but is insufficient, Fitch said.
“State banks are most in need, as almost half the 21 banks have common equity tier 1 (CET1) ratios below the FY19 minimum of 8 per cent,” the report noted.
While most legacy problems in non-performing loans have been recognised, Fitch also warned that the brisk pace of unsecured retail loans and SME funding provided over the previous few years renders these two segments vulnerable as interest rates rise. “Real estate and low-income housing loans could also cause higher NPLs where banks have a direct exposure or are indirectly exposed via non-banks,” it said.
Profits under pressure
Meanwhile, in a separate analysis of the first quarter results of 35 banks, CARE Ratings said that though the bad loan problem seems to be stabilising, net profit continues to remain under pressure for these banks.
The cumulative net loss of all banks stood at ₹2,244 crore for the first quarter of the fiscal, as against a growth of about 6.8 per cent in the year-ago period. Private banks witnessed a decline of over 18.5 per cent in net profits during the quarter.
“There has been an improvement of growth in credit and deposits,” it further noted.
The report also said that while non-performing assets (NPAs) are lower in the first quarter compared to a year ago, it is still not clear whether all legacy problems have been resolved.
“Another quarter of moderation in growth of NPAs could indicate that the recognition cycle is over,” it said. Gross NPAs stood at ₹8.71-lakh crore as of June 2018, of which ₹1.29-lakh crore resided in private banks and ₹7.42-lakh crore in PSBs.
via Banks’ outlook negative till capital position improves: Fitch – The Hindu BusinessLine
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