Standard & Poor’s ratings services today revised the outlook on its long-term counterparty credit ratings on 11 financial institutions from stable to negative.
The financial institutions that are facing its wrath are: State Bank of India, ICICI Bank, Indian Bank, Axis Bank, Union Bank, HDFC Bank, IDBI Bank, Indian Overseas Bank, Infrastructure Development Finance Company, Bank of India and Syndicate Bank.
However, it affirmed the long-term and short-term counterparty credit ratings, and the issue ratings on all these financial institutions. Even S&P’s banking industry country risk assessment (BICRA) score on India is unchanged at 5.
The outlook revision follows a similar action on the sovereign credit rating on India, where though the credit rating was maintained at BBB-, the outlook was revised to negative.
S&P said, negative outlooks on the 11 financial institutions reflect the outlook on the sovereign credit rating on India. The ratings could be lowered if the same would be done to the sovereign rating. It could also be downgraded if “the stand-alone credit profiles of these financial institutions deteriorate sharply; we believe that such deterioration is unlikely in most cases. We could revise the outlook to stable if we take a similar action on the sovereign rating.”
The agency has maintained the same rating of banks and sovereign credit because of direct and indirect influence that the sovereign in distress would have on a bank’s operations, including its ability to service foreign currency obligations, S&P says. Also, banks operate under government regulations, invest significant sum in government bonds and a large part of their revenue comes from government owned domestic companies.
The BICRA score is based on S&P’s evaluation of economic risk. S&P says though India has risks of low income and weak foreclosure laws, the banking system has been strengthened by stable customer deposits and strong banking regulations. However, disclosure standards, it says, are inadequate. Directed lending and government-ownership create some market distortion.
S&P has revised its outlook on seven Indian government-related entities (GREs) to negative from stable (NTPC, SAIL and NHPC, Power Finance Corp, India Infrastructure Finance, Indian Railway Finance Corp and Export-Import Bank of India) and three IT companies(Infosys, TCS, Wipro) .