Credit rating agency Moody’s Investors Service On Thursday said the profitability of Indian banks could be affected due to rising delinquency levels.
In addition, Moody’s Asian Banking Outlook 2009 said that public sector banks might need fresh capital due to their low levels of Tier-I capital and their inability to reduce government holding below 51 per cent.
The good news, however, is that the government has promised assistance to these banks and the private sector players have adequate capital, since they raised money earlier.
| NEGATIVE RETURNS Top 10 banks according to assets in 2008-09 | ||
| (Rs crore) | Gross NPA | Net NPA |
| SBI | 15,588.60 | 9,552.02 |
| ICICI Bank | 9,649.31 | 4,553.94 |
| PNB | 2,767.47 | 263.85 |
| BoB | 1,842.92 | 451.15 |
| Bank of India | 2,470.88 | 628.21 |
| HDFC Bank | 1,988.07 | 627.62 |
| IDBI Bank | 1,435.69 | 948.96 |
| Union Bank | 1,923.35 | 325.94 |
| Central Bank | 2,316.00 | 1,063.00 |
| Axis Bank | 897.77 | 327.13 |
“Such a development (assistance to government banks) would not only raise the banks’ Tier-I and tangible equity ratios and support future loan expansion, it would also enhance their loss absorption capacity. Under the current difficult market conditions, we consider a bank’s equity buffer as an important rating driver, as strongly capitalised banks can sustain possible loan losses stemming from an adverse credit cycle,” the report said.
The report said banks faced higher levels of non-performing assets as flow of credit to the real economy had decreased, resulting in higher capital cost for companies. In addition, credit cycle has turned and corporate earnings have weakened, which would put a strain the asset quality.
In January, the agency had credit outlook for Indian banks from stable to negative on account of the economic slowdown and the prospects of weaker asset quality. It, however, pointed out that Indian banks had remained largely unaffected by the global financial crisis.
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It said that ratings could improve once the implementation of technological improvements by public sector banks yielded results, there was a significant improvement in structural profitability through cost rationalisation and containment of non-performing loans and earnings quality improved on account of further development of fee-based income streams.
However, ratings could be adversely affected on account of significant asset quality deterioration and weakening of provisioning levels. In addition, declining Tier-I capital ratio, with limited prospects of being replenished, and additional pressure on the market position of public sector banks could make rating fall, the report said.
Apart from India, Moody’s outlined a negative forecast for southeast and south Asian banks due to the impact of the global and domestic slowdown in the region’s economies.
“The widespread presence of negative industry outlooks across the banking systems covered by Moody’s in the region reflects our basically cautious stance over the next 12 months,” it said.
Also, the mildly positive macro-economic indicators and signs of stock market recovery have only recently emerged and do raise doubts over the certainty of a swift recovery, the report said.