Moody's Investors Service on Wednesday lowered its outlook for India's banking system to negative from stable, citing concerns that bad loans would rise and profits would be hit.
The rating revision, which comes on the back of a downgrade of SBI last month, triggered sell orders on bank stocks. SBI saw its share price fall the most by 6.76% to Rs 1,862. State-owned banks were particularly hit with Bank of Baroda falling 3.63% and IDBI Bank 3.63%. SBI was downgraded earlier as its tier one capital had fallen below 8%. SBI chairman Pratip Chaudhurimaintained that the government was ready to infuse Rs 3,000- 4,000 crore capital into the bank. The move took bank chiefs by surprise as they have been repeatedly maintaining that Indian banks were in a very healthy position. Bank chairmen were of the unanimous view that Moody's had jumped the gun after failing to respond to the banking crisis in the West in time.
"Unlike the West, Indian banks do not have exposure to exotic products. Also Indian banks are better capitalized with a leverage of only 12 to 14 as compared to 18 for the best banks in the West" said Chaudhuri. Sources said that finance ministry officials were enraged by the move and were likely to push banks to challenge the review.
"India's economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates. At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing program of the Indian government, which could drain funds away from the private credit market," said Vineet Gupta, a Moody's vice president and senior analyst.
Moody's rates 15 commercial banks in India, which together account for about 66% of the system's total assets as of March 2011. "With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013," said Gupta. Moody's said that loan growth was expected to be a strain on the banks' capital over the horizon of this outlook which is for the next 18 months. "As monetary conditions tighten and economic activities slow, we expect bank loan growth to fall to 16%-18% in FY2012 and FY2013, from 21% in FY2011," Gupta added.
The negative outlook is also quite contradictory to Moody's stable outlook assigned to the bank financial strength ratings of 14 of the 15 rated banks. The rating agency however said that there was a possibility of the ratings for the individual banks changing. "For those banks with weaker capital ratios on average and higher asset quality pressures relative to their individual rating levels, their standalone ratings are likely to come under pressure as underscored by Moody's downgrade of the State Bank of India," the statement said.
State Bank of India's bad loans spook investors
State Bank of India posted a 12.4 percent rise in earnings, halting a two-quarter decline, but worsening asset quality rattled investors and sent its shares skidding by as much as 7.3 percent.
Worries about rising bad loans in Asia's third-largest economy prompted Moody's Investors Service earlier on Wednesday to cut its outlook on the Indian banking sector to "negative" from "stable."
The ratings agency said monetary tightening and a slowdown in the economy would cut bank loan growth, while a recent liberalization of savings deposit rates by the central bank would put pressure on lenders' profitability.
Net non-performing assets (NPAs) at SBI, which controls about a quarter of Indian bank loans and deposits, increased to 2.04 percent of total assets at the end of September from 1.7 percent a year earlier.
"It is the increase in NPAs that hit the stocks today. It is a concern for the entire sector," said Arun Khurana, fund manager at UTI Banking Fund.
"However, going forward we expect pain from legacy NPAs to subside," he added.
Shares in SBI, which said it expects a government capital infusion in the current fiscal year, ended down 6.77 percent at 1,862.05 rupees in a Mumbai market that closed down 1.18 percent. The drop in its shares was the sharpest since May, when it disappointed investors on its March quarter earnings.
SBI shares, valued at nearly $26 billion, are down more than a third in 2011, underperforming the banking sector index , which is down 18.6 percent in the period. The broader market has lost about 15 percent of its value .
"The bank has experienced certain amount of challenge on NPA front," Chairman Pratip Choudhuri told reporters in a post-earnings conference.
"We had the highest NPAs from iron and steel -- metal sector. Second was from government-sponsored schemes," he said.
Fund managers concerned about deteriorating asset quality in public sector banks said investor interest could shift to private lenders with safer assets.
On Tuesday, smaller state-run peer Bank of India said its September-quarter net profit fell more than a fifth on higher provisions to cover worsening asset quality.
In contrast, other mid-sized lenders including Vijaya Bank , Bank of Baroda and Dena Bank posted strong quarterly profits, mostly exceeding street estimates, on higher interest income and better asset quality.
"People are likely to stray from state-run banks to private ones, some of which have better asset quality," a local fund manager who did not want to be named said.
"But then valuations are going to come down, and from a long-term risk-return perspective, it makes sense to go for SBI."
FORECAST-BEATING PROFIT
SBI reported net profit of 28.1 billion rupees ($559.76 million) for its fiscal second quarter ended Sept. 30, compared with 25.01 billion rupees a year earlier.
A Reuters poll had projected net profit of 24.3 billion rupees on a standalone basis.
Net interest income rose about 28 percent from the previous year to 104.2 billion rupees.
The state-run bank increased its provisions for non-performing assets by 35 percent over the previous year to 29.21 billion rupees in the quarter.
Private sector rivals ICICI Bank and HDFC Bank had earlier posted forecast-beating net profit increases of 22 percent and 32 percent, respectively.
SBI reported net interest margin of 3.7 percent in the September quarter, compared with 3.3 percent a year-ago. It expects the margin to remain in a 3.5-3.65 percent range for the fiscal year ending in March.
India's central bank, which expects credit to grow by 18 percent in the full fiscal year, raised interest rates last month for the 13th time in a tightening cycle that began in early 2010 to fight persistently high inflation.
Policy rates are at their highest since the global financial crisis in 2008, and many investors and corporate officials have been calling on the central bank to halt its monetary tightening given the slowdown in growth.
ADEQUATE FUNDS, RISING SAVINGS DEPOSIT
SBI needs to raise 80 billion rupees before March to maintain tier-I capital adequacy ratio of 8 percent and is seeking government help to raise the funds.
Chaudhuri said the bank has "categorical assurance" from the finance ministry for 30-40 billion rupees of fund infusion in the current fiscal year.
Last month, Moody's had downgraded standalone rating for SBI citing thin capital cushion and weakening asset quality, prompting the government to give assurance for boosting the bank's capital base.
Chaudhuri on Wednesday said that the bank has enough liquidity to fund loan demand during the year, even if government funding fails to come.
SBI, which had savings deposit growth of 16 percent in September quarter, expects to surpass that level in the coming months even if it does not raise interest rates for savings depositors, Chaudhuri said.
India's central bank last month deregulated savings deposit rates, its last administered bank rate, in a move that will expose such accounts to policy rates changes and push up the cost of funds for banks.
Chaudhuri also allayed concerns about Indian banks after Moody's downgrade.
"We feel they're stung by the experience elsewhere and they like to believe the worst for banks. I think Indian banks are very well regulated, we audited and there is a better scrutiny," Chaudhuri told reporters. ($1 = 50.2 rupees) (Editing by Tony Munroe and Aradhana Aravindan)
Source:The Times of India
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