ICRA expects bank stress to continue for three years

ICRA lowered the ratings of Oriental Bank of Commerce's outstanding long-term bonds, including Tier-I capital bonds

Rating agency ICRA on Friday said the stress in banks would likely impact earnings and solvency over the next two-three years. It also downgraded the long-term rating of United Bank of India (UBI) to ‘negative’ from ‘stable’ and lowered the ratings of Oriental Bank of Commerce (OBC)’s outstanding long-term bonds, including Tier-I capital bonds.

While maintaining that stress in the banking sector would continue for the next few years, ICRA said even to maintain a credit growth of 10-12 per cent per annum between 2015-16 and 2018-19, public sector banks (PSBs) would need to raise Tier I capital of Rs 1.6-2.4 lakh crore and additional Tier 1 (AT1) capital of Rs 1.0-1.1 lakh crore.

“If the government restricts its capital infusion plan to Rs 70,000 crore for FY16-FY19, several PSBs could have restricted growth leading to further pressure on their credit profile,” ICRA said in its banking sector outlook, adding in the next few days, it would continue to downgrade even more public sector banks.

While continuation of timely support from the government would be a key driver for the ratings, it would be a challenge for banks to reduce the pace of fresh NPA generation as well as recover from a large stock of gross NPAs and standard restructured advances, estimated at around 13.3 per cent on December 31, 2015.

Furthermore, the rating agency expected gross NPAs ratio to worsen in the fourth quarter on account of the Reserve Bank of India’s asset quality review exercise.

While downgrading OBC’s additional Tier-I bonds, used for capital raising, the rating agency said the bank had full discretion to cancel distribution or payments of bonds as the “minimum capital conservation ratio applicable to banks may restrict it from servicing these bonds in case the common equity Tier-I falls below the limit prescribed by the RBI.”

The rating of the bond, outstanding at Rs 1,000, was revised from AA- negative to A+ stable. The agency also downgraded other bonds of the bank by a notch.

The prospect of non-payment of coupon comes when bank stocks fall below a certain level or a bank reports losses or its core capital is eroded. In case of OBC, the revision in rating was on account of “higher than anticipated stress, slower than expected pace of recovery and weak outlook for several credit intensive sectors, which led to sharp deterioration in asset quality indicators of the bank and has impacted the earnings profile of the bank.”

ICRA said the earnings profile of the bank over the medium term was likely to remain weak given the relatively high share of stressed assets and relatively high unprovided net NPAs.  Even after excluding exposure to state electricity boards and Air India, OBC’s restructured advances were at 7.4 per cent of the total loans, and net NPAs at 4.99 per cent in December 2015. “Limited visibility on capital availability to fully support credit growth while meeting the regulatory minimum requirement also constrains the rating,” ICRA noted. In the case of UBI, the revision reflected “significant continued pressure on earnings and solvency” of the bank “due to deterioration in asset quality as well as limited visibility on capital availability to fully support credit growth while meeting the regulatory minimum requirement,” it stated.