India Ratings maintains stable outlook for large state-run banks citing access to growth capital

Mumbai: Domestic rating agency Indian Ratings and Research Wednesday maintained stable outlook on large public sector banks and private sector banks supported by high levels of capital. “We expect large public sector banks with better access to capital and private sector banks with their robust capitalisation to navigate another year of low growth and high credit costs with a stable outlook,” India Rating’s research analyst Abhishek Bhattacharya said. The rating agency today released its report - Indian Banks Outlook for FY18. India Ratings, however, retained its negative outlook on mid-sized and smaller state-run banks due to limited access to capital and large non-performing assets. “These banks will find it increasingly difficult to grow given increasing capital requirements and large funding gaps impeding their ability to compete on spreads,” Bhattacharya noted. He said banks would need Rs 91,000 crore in tier-I capital till March 2019 to grow at a bare minimum pace of 8-9 percent CAGR. It includes the Rs 20,000 crore of residual tranches from the government’s Indradhanush programme. [caption id=“attachment_3206718” align=“alignleft” width=“380”]  Representational image. AFP[/caption] “There is an increasing divide between the large and smaller PSBs, with the former having some access to growth capital, better market valuation, and also some non-core assets to divest while the latter would only receive bailout capital if required and would need to ration their capital consumption over next two years,” the rating agency said. It estimates the requirement of additional tier-I (AT1) bonds to be Rs 50,000 crore till March 2019. Bhattacharya said impaired assets of banks are expected to peak at 12.5-13 percent by the financial year 2017-18 and 2018-19, which is likely to be at 12 percent by the end of financial year 2016-17. He said sectors such as iron and steel and textiles have seen a fair bit of recognition but provisioning might still not be adequate to protect against eventual loss given defaults (LGDs). Significant proportion of unrecognised stress pertains to sectors such as infrastructure, realty and capital goods which potentially have long-term viable assets but would increasingly need cash flow restructuring to avoid slippages in absence of alternate refinancing sources, he said. “With recent regulations further impeding the ability of asset reconstruction companies (ARCs) to buy meaningful assets, and nature of stress being predominantly balance sheet driven, banks would need concerted resolution with a ‘going concern’ approach to avoid deep losses,” he said. The rating agency expects a prolonged recovery cycle unlike the FY02-FY07 bounce-back. It sees a meaningful capex-led demand to be sometime away and medium-term growth to be driven by retail and SME segments which have their own set of challenges. The report expects sector’s net interest margins (NIMs) to remain stable at 2.9 percent for the financial year 2017-18, 15-20 basis points lower than the long-term average. It estimates demonetisation impact to benefit CASA ratio of state-run banks by 200-250 basis points by March 2017 compared with a year earlier. The rating agency also maintained a stable outlook on the non-bank finance company (NBFC) sector and on the major NBFCs rated by it for the financial year 2017-18. “The agency expects credit costs to rise for a few of the asset classes in the financial year 2017-18, though most of the highly rated NBFCs would continue to report adequate profitability and capital buffers,” it said. The government’s drive to integrate informal economy into the formal segment and reduce unaccounted income, and digital push, if followed through, can significantly change operating dynamics for some of the asset classes. “Few of the competitive strengths of NBFCs especially the informal method of income assessment for certain asset classes (loan against property (LAP), new commercial vehicle (CV) lending may become less relevant in due course and increase banks’ participation in the segment,” it said. NBFCs, however, would continue to expand in certain asset classes, geographies and in small ticket loans, where banks are clearly less efficient like microfinance loans, light CVs, used CVs, small ticket housing, small ticket LAP. The rating agency said some asset classes in the retail asset segment of NBFCs, which had started showing stable delinquency rates in the first half the financial year 2016-17, are likely to see asset quality pressures in the fourth quarter of the current financial year. “This may flow in first half of the financial year 2017-18 as the lagged impact of demonetisation is felt across retail and wholesale NBFCs,” the report said. Retail NBFCs should, however, start recovering in second of the financial year 2017-18 though the recovery for wholesale NBFCs is likely to be more gradual, it said.