Crisil downgrades debt instruments of eight public sector banks

Rating agency also revises outlook of 5 other banks to ‘negative’ on loan quality concerns

Mumbai, March 10:  

Expecting the asset quality problems being faced by public sector banks to remain acute and continue through most of the next fiscal, Crisil on Thursday downgraded its ratings on the debt instruments of eight banks and revised its outlook on five other to ‘negative’ from ‘stable’.

The credit rating agency warned that the earnings profile of most PSBs has deteriorated with many expected to report a full-year net loss this fiscal. Further, many PSBs may report a loss even for the next fiscal.

The eight public sector banks (PSBs) whose debt instrument ratings have been downgraded are — Bank of India, Central Bank of India, Corporation Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Syndicate Bank, and UCO Bank.

The five PSBs whose outlook has been revised by Crisil to ‘negative’ are — Andhra Bank, Bank of Baroda, Canara Bank, Punjab National Bank, and Punjab & Sind Bank.

In the case of Syndicate Bank, its rating has also been placed on ‘rating watch with negative implications’.

Continued stress

Crisil said the continued asset quality problems will have its impact on PSBs’ profitability, and capitalisation can further dent the credit profiles over the medium term.

The agency estimated that significant stress in the corporate loan book of PSBs is expected to result in their weak assets ballooning to Rs. 7.1 lakh crore by March 31, 2017 (11.3 per cent of total loan book) from about Rs. 4 lakh crore as on March 31, 2015 (7.2 per cent of loan book).

Over the next few quarters, Crisil expects slippages to non-performing assets (NPAs) to remain high, driven by stretched cash flows of highly-leveraged corporates (mainly in vulnerable sectors, such as infrastructure, metals and real estate), continued proactive recognition of stressed assets by banks, and limited ability of banks in the current environment to recover from exposure to large corporates that have slipped into NPAs.

With the banking system having to migrate to the marginal cost of funds-based lending rate, or MCLR, regime from April 1, 2016, and the proportion of zero income-generating bad assets in the loan book of PSBs rising, net interest margin will come under fresh pressure in the near term.

“This, coupled with loan loss provisioning at a number of PSBs surpassing pre-provisioning profit due to increased slippages and rising inventory of ageing NPAs, could result in many PSBs reporting a loss even for the next fiscal,” said Crisil.

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Banks with strong networks will find takers

Mumbai The government, which recently stepped up focus on consolidating weaker public sector banks (PSBs), plans to reduce the number from 27 now to six or seven larger banks.While market capitalisation is a reflection of how the Street (investors, analysts, etc) views the bank's core fundamentals, the current state as well as the future prospects, a detailed look at the nine months' data of these banks provides some insight on their financial and business condition.In terms of asset quality, for instance, Indian Overseas Bank (IOB) and UCO Bank are the worst placed as they had the highest gross non-performing assets (NPA) at 12.6 per cent and 11 per cent, respectively, as on December 31, 2015.Dena Bank was the third on this list with gross NPA ratio of 9.9 per cent. 

However, if one adds the restructured assets, it would reflect the real asset quality picture of a bank. While the latest figures of total stressed assets for many banks are not available, the situation is not alarming, say analysts.Many PSBs also have low levels of capital to fund growth as well as any fresh losses that they may witness on account of bad loans. For example, while Dena Bank reported a net loss for the nine months ending December 31, 2015; its Tier-1 capital of 7.1 per cent is the lowest amongst its peers. United Bank's Tier-1 capital ratio, too, stood at 7.1 per cent in this period. Again, not all banks have declared their Tier-1 capital ratios as at the end of the December 2015 quarter.Notably, while PSBs consolidation will be largely driven by regulations, larger banks would not want to buy banks having low capital adequacy as well as poor asset quality, unless they prove to be of strategic importance. A key factor that will aid consolidation will be a bank's branch network. Historically, banks having larger presence in one region have bought smaller banks having stronger presence in another region. This ensures there is minimal overlap and the businesses are complementary in nature. The key hurdle and integration challenge, though, will be the employee unions in some of the PSBs that might resist such mergers and acquisitions. Nevertheless, with the advent of digital banking, the attraction of a branch network might not be enough.Analysts, however, believe most smaller and relatively weaker PSU banks could be potential takeover targets.Vaibhav Agrawal of Angel Broking says, "United Bank, IOB, OBC, Dena Bank, Vijaya Bank, Bank of Maharashtra, Andhra Bank, Indian Bank, Corporation Bank, among others, could be key takeover targets. The prime criteria will be complementary network, capital adequacy, asset quality, unions and actual integration of this merger."

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Six or more anchor banks likely to lead consolidation

The government will identify six to ten public sector banks which will drive the consolidation process among the state-owned banks, according to bankers.

Called the anchor banks, they will be identified by October 31, 2016, the bankers told The Hindu.

Large lenders like State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB) and Canara Bank could become the anchor banks, they said.The government will set up an expert panel for the consolidation process. The Bank Board Bureau headed by former Comptroller and Auditor General (CAG) Vinod Rai, which was recently formed to select chief executives and board members of public sector banks, will also help in the consolidation process.

The idea of bank consolidation was discussed at length during the ‘Gyan Sangam’ bankers’ retreat at Gurgaon last week.

Top finance ministry officials, bankers and Reserve Bank of India (RBI) officials were present during the discussions.

Merger between the banks will be based on geographical and technological synergies, human resources and business profile, among others.

Consolidation among public sector banks has been under discussionfor about a decade now.The previous United Progressive Alliance (UPA) government also wanted consolidation among public sector banks but had maintained that such a proposal should come from bank boards.

However, no bank went ahead with such a proposal, formally. There are 22 public sector banks in the country apart from five associate banks of State Bank of India. The present National Democratic Alliance (NDA) government has looked at the consolidation process differently and initiated it, bankers said.

Interestingly, during last year’s Gyan Sangam in Pune, bankers had opposed the idea of consolidation among public sector banks on the ground that the financial health of most of the banks had deteriorated. Hence, no bank was ready to absorb even a weaker institution.The mood at in this year’sGyan Sangam was different, bankers said. “The tone was set from the beginning. It was not a question of whether to consolidate or not, rather how to consolidate,” said a banker who attended the retreat.

“We were given the choice of either merging with other bank or to perform without the support of capital infusion from government,” said another banker. He said it will be difficult for public sector banks to survive without government capital.

The financial performance of public sector banks reflected a sharp deterioration after the RBI conducted an Asset Quality Review (AQR). During the review, the central bank’s inspectors found that many accounts, which ideally should have been treated as non-performing, were not classified so by the banks. The RBI then directed the banks to classify those accounts as non-performing and provide accordingly during the October-December and January-March quarters. As a result, as many as 11 public sector banks including Bank of Baroda, IDBI Bank, Bank of India and Indian Overseas Bank reported losses last quarter. The current quarter will be equally challenging for many banks.

“Things have changed since the AQR,” another banker pointed out. “There are many banks which will find it difficult to survive without capital infusion from government. If a bank remains weak, then it will lose business. In such a situation, merging with a relatively stronger bank seems to be the only option.”

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