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Fitch: Weak Capital Drives Negative Indian Bank Sector Outlook
September 14, 2017 / 8:19 AM / 8 days ago

Fitch: Weak Capital Drives Negative Indian Bank Sector Outlook

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Indian Banks FY17 Report Card here MUMBAI, September 14 (Fitch) Indian banks' sector outlook will likely remain negative in the future as their weak financial performance and vulnerable core capitalisation continue to put pressure on intrinsic creditworthiness, says Fitch Ratings. State banks remain the most at risk as persistent losses have battered their weak capital position while their dominant stock of non-performing loans (NPLs) continues to be a significant overhang on their ability to pursue meaningful growth. Loan growth dipped to a multi-decade low of 4.4% in the year ended March 2017 (FY17) as state banks continued to rationalise assets to conserve capital in the absence of greater capital injections from the state. The large private-sector banks' financials also weakened considerably in FY17 but their stronger capital position and satisfactory earnings buffer put them in a relatively better position compared with their state-owned peers. Fitch estimates Indian banks will need USD65 billion in additional capital to meet Basel III requirements by 2019 with state banks requiring around 95% of the total. We view raising capital as the biggest challenge for state banks as most have few practical options except to rely on the state for support. Access to the Additional Tier 1 (AT1) capital market has improved but around two-thirds of the capital shortage is in the form of common equity Tier 1 (CET1). The challenges for the sector persisted in 1QFY18 as loan growth was weak while asset quality continued to deteriorate due to higher delinquencies in the agriculture and retail sector as a result of politically motivated waivers on farm loans in some Indian states and the expiry of forbearance on small ticket demonetisation-related NPLs. A pickup in domestic issuance of AT1 securities did support overall capital ratios with the issuance of around INR130 billion (USD2 billion) in 1QFY18 while there was none a year earlier. However, pressure on core capital ratios was persistent on account of subdued earnings and the lack of fresh equity injection, except in the case of IDBI Bank Ltd. (BB+/Stable) where the core capital ratio had dipped precariously close to the regulatory minimum. Fitch's full report, "Indian Banks FY17 Report Card" is available at www.fitchratings.com or by clicking the link in this media release. Contact: Saswata Guha Director Financial Institutions +91 22 4000 1741 Fitch India Services Pvt. Ltd. Wockhardt Towers, West Wing, Level 4 Bandra Kurla Complex, Bandra East Mumbai, 400 051 Jobin Jacob Associate Director +91 22 4000 1773 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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