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13 July 2016
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PSB(The Total Investment & Insurance Solutions)
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Limited availability of growth capital for
public sector banks (PSBs) could pull down their loan growth trajectories to a
CAGR of 9% over FY16-FY19, says India Ratings and Research (Ind-Ra). The
Total Investment & Insurance Solutions
This growth is the bare minimum needed to
generate sufficient spreads that can absorb our expected operating and credit
costs over this period, the ratings agency says. The
Total Investment & Insurance Solutions
Ind-Ra says, "The growth is likely to be
lower at 8.1% over FY16-FY19 for mid-sized PSBs with a few banks witnessing a
loan book decline. Even for this growth, Ind-Ra estimates the average Tier-1
capital needed during FY17-FY19 to be around 22% of FYE16 CET (36% for
mid-sized PSBs). This estimate is over and above the capital committed under
Indradhanush programme."
While Ind-Ra says its expectation of limited
credit demand beyond the refinancing requirements of levered corporates appears
to be largely in line with the estimated credit supply for FY17, a sustained
moderation in PSBs' credit growth is likely to start impacting the nominal
gross domestic product pick-up for FY18-FY19. The
Total Investment & Insurance Solutions
The ratings agency expects non-performing
loan (NPL) aging to keep credit costs for PSBs at elevated levels of 170-180
basis points (bp) in FY17 compared with 280bp in FY16, continuing the pressure
on profitability and consequently, some PSBs would continue to report losses in
FY17.
Following the asset quality review (AQR) by
the Reserve Bank of India (RBI) during first half of FY16, a sizeable
proportion of NPLs, including slippages from FY15, is likely to shift to the
next classification bucket over FY17-FY18, attracting higher provisioning. The
quantum of fresh slippages from the large corporate exposure may come down
during FY17-FY18, the ratings agency feels.
Ind-Ra says it expects un-provided
non-fund-based exposures of large stressed accounts to continue to pose a
threat to profitability for FY17-FY18. "However, the AQR exercise has
ensured recognition of impaired loans and higher provisioning for cyclical
sectors in deep stress, such as iron and steel, and a large proportion of
stressed corporates that are yet to be provided for now belong to the
infrastructure sector. Hence, stress resolution with a going concern approach,
such as the Scheme for Sustainable Structuring of Stressed Assets (S4A)
may prove to be effective," it added. The Total Investment
& Insurance Solutions
Ind-Ra's support floor for PSBs remains
unchanged as the agency expects, even under severe stress scenario, the
potential equity requirement or the bailout cost, to avoid approaching the
point of non-viability triggers, to be manageable at Rs8,500 crore to Rs10,000
crore. This, the agency says, however, could change if the government of India
changes its support stance.
The agency believes that the chances of
additional tier 1 (AT1) coupon deferral remain high for banks with depleted
reserves. It says, "Elevated credit costs are likely to keep profits
subdued which would put PSBs with low, or in some cases non-existent, revenue
reserves under pressure. However, we believes that the ability to service AT1
bonds varies widely within PSBs with a few banks benefitting from having built
significant retained earnings over the years and a few with their stronger
standalone profiles."
Ind-Ra estimated that at this projected
growth PSBs still require a Tier-1 capital of Rs1.2 lakh crore over FY17-FY19
including Rs40,000 crore in common equity tier 1 and Rs71,000 crore in AT1
bonds. The need for a pickup in AT1 market remains critical to managing the
capital availability through the Basel-III transition. A mere Rs18,000 crore of
AT1 bonds have been issued so far, with insurance and pension funds, which have
the requisite liability profile and risk appetite to invest in these
instruments, keeping away on account of regulatory hurdles and inadequate price
discovery. The Total Investment & Insurance
Solutions
Ind-Ra believes that barring a few large
PSBs, most banks are looking to consolidate their balance sheets, reduce
risk-weighted assets, and preserve capital. The
Total Investment & Insurance Solutions
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