Global rating agency Standard & Poor's (S&P) Ratings Services has affirmed its negative rating on seven public sector banks in India. The banks on which S&P has affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings include Bank of India (BOI), Indian Overseas Bank (IOB), Indian Bank, State Bank of India (SBI), Syndicate Bank and Union Bank of India (UBI).
The S&P has further revised the stand-alone credit profile (SACP) of SBI to 'bbb-' from 'bbb' and that of UBI to 'bb+' from 'bbb-' based on anticipation of the banks' weak asset quality performance.
"While we also anticipate that the asset quality of the other five banks could come under some stress, it is likely to be within our base-case expectation. Our assessment of the SACPs of these five banks is unchanged: Indian Bank at 'bbb'; BOI at 'bbb-'; and IDBI, IOB, and Syndicate Bank at 'bb+'. Our 'BBB-' issuer credit ratings on all the seven banks reflect our expectation of extraordinary support from the government of India (unsolicited rating BBB-/Negative/A-3). However, the ratings on Indian Bank are constrained by the ratings on India because the bank's SACP is higher than the 'BBB-' sovereign rating," S&P said.
S&P said they had affirmed the ratings on all the banks to reflect our expectation that the ratings can withstand the base-case stress from a likely deterioration in asset quality. The rating firm also said that there is a very high likelihood that the government would provide timely and sufficient extraordinary support to all these banks in the event of financial distress.
S&P revised the SACPs of SBI and UBI because it expect the banks' asset quality to remain weak and credit costs to stay high. "We have revised our risk position assessment on these banks to "moderate" from "adequate," as our criteria define those terms. We expect SBI's and UBI's asset quality to remain stressed in the fiscal years ending March 31, 2013, and 2014, partly due to continued slippages in their restructured loan books."
SBI's gross nonperforming loan (NPL) ratio of 5% (on a stand-alone basis) as of June 30, 2012, is the highest among the Indian banks that we rate. On a stand-alone basis, the bank's mid-corporate (NPL: 9.3%) and agriculture (NPL: 9.8%) portfolios are particularly stressed.
NPLs in UBI's agriculture portfolio have also surged. Moreover, the bank has asset concentration in its infrastructure portfolio, especially in the power sector, which is facing challenges, such as fuel shortages, delays in securing environmental clearances, and a slow pace of tariff reforms. S&P has lowered the issue ratings on UBI's hybrid issues (upper Tier 2 subordinated and hybrid Tier 1 notes under the bank's medium-term notes program) to 'B+' from 'BB'. The bank's SACP is in a speculative–grade category. "Therefore, in line with our criteria, we rate the hybrid issues three notches lower than the SACP."