CRISIL has revised its outlook on the long-term debt instruments (excluding Basel III Tier I) of 18 public sector banks (PSB) to ‘Stable from ‘Negative’, while reaffirming their ratings.
The revision in outlook is primarily driven by government’s PSB recapitalisation programme for this fiscal, which will improve the financial risk profile of these banks and also help them meet Basel III regulatory capital norms, and provide cushion against expected rise in provisioning for non-performing assets (NPAs).
The ratings on Basel III Tier I bonds of nine PSBs have also been reaffirmed, and the outlook has been retained as ‘Negative’. CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank’s balance in share premium account and its implication on the availability of eligible reserves to service AT1 coupon payments. We will revisit our ratings on AT1 instruments once there is clarity.
On October 24, 2017 after the government announced its Rs 2.11 lakh crore recapitalisation plan, CRISIL had said that it was credit positive for public sector banks and when details of the capital infusion for individual PSBs are announced, it will consider those and take appropriate rating action.
On Wednesday, the government announced details of bank-wise infusion of ~Rs 88,000 crore capital this fiscal.
CRISIL has assessed the impact of this and believes with expected capital infusion from government, PSBs are now adequately placed to meet Basel III capital norms and are also better prepared to absorb the hit from provisioning on stressed assets and also on account of migration to Ind AS (Indian Accounting Standards).The government has also outlined its banking reforms agenda. The strengthening of prudent lending practices through responsible banking – that is, banking based on core strengths, sharper pre- and post-disbursal monitoring for large exposures, and improving NPA resolution mechanisms (including separate asset management verticals), will structurally improve credit culture at PSBs.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “The recapitalisation plan while emphasising government’s support, also persuades public sector banks to up the ante on responsible banking. The upshot of more accountability, governance and efficiencies is a structurally stronger banking system and improved investor sentiment towards them.”
Asset quality issues are peaking for banks with incremental slippages to NPAs expected to taper in fiscal 2018 and 2019 as credit health of corporate borrowers’ are improving. However, the resolution of large corporate stressed accounts under the Insolvency and Bankruptcy Code and the potential haircuts thereof are expected to increase the provisioning burden of PSBs and impact their earnings profile and capital position in the near term.
CRISIL will continue to monitor the performance of PSBs - their asset quality and profitability performance, and the capital support from the government in future and will appropriately factor in the same in the ratings of these banks.
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