Crisil downgrades 8 PSU banks; Fitch sees NPAs improving marginally

Credit rating agency Crisil has downgraded eight public sector banks and revised the outlook to negative for five others, even as Fitch Rating saw a likely improvement in the non-performing asset (NPA) ratio of banks to 10.9 per cent by the end of this fiscal.

While most rating agencies have either downgraded public sector lenders or have projected a negative outlook for them, Crisil said the asset quality of banks is unlikely to improve any soon.
 
"Actions are driven by expectations that asset quality problems being faced by PSBs will remain acute and continue through most of the next financial year. The resultant impact on profitability and capitalisation can further dent their credit profiles over the medium term," the rating agency said in a report.

Crisil has now downgraded Bank of India to AA+/Negative from AAA/Negative, Central Bank of India (AA-/Negative from AA/Negative), Syndicate Bank (AA from AA+/Stable; placed on rating watch with negative implications), UCO Bank (AA/Negative from AA+/Negative), Indian Overseas Bank (A+/Negative from AA-/Negative), Corporations Bank (AA- from AA+/Stable), Dena Bank (AA-/Negative from AA+/Negative), and IDBI Bank (AA/Negative from AA+/Negative).

"A significant stress in the corporate loan book of PSBs is expected to result in their weak assets ballooning to Rs7,10,000 crore by March 31, 2017 (11.3 per cent of total loan book) from around Rs4,00,000 crore as on March 31, 2015 (7.2 per cent of loan book)," the agency said.

Crisil's rating downgrade follows comments by New York-based rating agency Standard & Poor's that the Union Budget is credit negative for public sector lenders after the government fell short of the market's expectation on capital infusion.

The budget for the 2016-17 fiscal has allocated only Rs25,000 crore for recapitalisation of PSU banks compared with expectations of Rs35,000 crore.

Crisil expects banks' NPA issues to linger at least till the fourth quarter as it sees bad loans ballooning to Rs7,00,000 crore by the end of this financial year.

"Over the next few quarters, slippages to NPAs will remain high driven by stretched cash flows of highly leveraged companies (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 companies that have slipped into NPAs," Crisil said.

According to Fitch Ratings, the banking system at present has stressed assets of around Rs900,000 crore, but it expects a bottoming out of NPAs. It expects NPA ratios of banks to improve marginally to 10.9 per cent by the end of this fiscal.

"We expect banks' stressed assets ratio to improve marginally to 10.9 per cent in 2015-16 from 11.1 per cent in 2014-15, although there is still some time before absolute non-performing assets (NPAs) witness a reversal," Fitch's director for financial institutions Saswata Guha told reporters.