ICRA cautions on the deterioration in Credit Profile of PSBs; Rating actions to follow
As per ICRA, credit profile of PSBs has worsened because of higher than anticipated stress, slower than expected pace of recovery and weak outlook for several credit intensive sectors.
Higher level of stress is likely to significantly impact earnings and solvency profile of PSBs over next 2-3 years. Additionally adverse capital markets conditions have reduced the prospects of mobilizing capital from non-Government sources, while there has been no material success in mobilizing capital through Additional Tier I (AT1) instruments. All these factors contribute to deterioration in credit profile of the PSBs, which may get reflected in ratings / outlook change announcements for some of the PSBs over next few days once the rating reviews are concluded.
ICRA acknowledges, any material change in the above conditions may offset some pressure on the credit profile of PSBs and will incorporate the impact of such developments as and when these are known.
ICRA ratings for PSBs continue to assume high level of support from Government of India (GoI), later being majority shareholder in PSBs. Continuation of timely support from GOI would continue to remain a key driver for the ratings.
In light of the challenges highlighted above and higher exposure of PSBs to stressed sectors, their asset quality indicators are likely to remain weak over next 1-2 years. As it would be a challenge to reduce the pace of fresh NPA generation as well as recover from a large stock of Gross NPAs and standard restructured advances, estimated at around 13.3% as on December 31, 2015.
Acknowledgement of stress by PSBs was reflected in Q3, FY16 asset quality indicators, post RBI’s ‘asset quality review’. PSBs’ Gross NPAs % increased from 5.6% as on September 2015 to 7.1% as on December 2015. PSBs Gross NPAs % are expected to worsen further in Q4, FY16 on account of asset quality review exercise.
Higher than expected slippage in asset quality has led to significant dilution in earnings in relation to the risk (annualised operating profits in relation to net NPAs have dropped to 47% in Q3, FY16 from 71% in Q2, FY16).
Additionally, sizeable Net NPAs (4.3% as on December 31, 2015) and other weak assets (standard restructured advances of around 6.2% and some other weak standard assets) are likely to keep credit costs elevated over next 2-3 years, leading to pressure on earnings and therefore internal capital generation as well as PSBs ability to raise capital from non-government sources.
Further, PSBs Net NPAs in relation to Net worth have increased to 47% as on December 2015 from 35% as September 2015, weakening their ability to withstand unexpected losses.
PSB’s aggregated Tier I capital is estimated at around 8.2% as on December 2015. In light of expected low internal capital generation (less than 5-6% over next 12 months), limited visibility on PSBs ability to raise capital from non-government sources as well as investor appetite for AT1 issuances, PSBs’ dependence on GoI for fresh capital raising is expected to be very high. In ICRA’s estimate Tier I capital raising requirement during FY16-FY19 for majority of PSBs is more than 150% of current market capitalisation.
In light of recent pressure on profitability and internal capital generation, In ICRA’s estimate, even to maintain a credit growth of 10-12% per annum during FY16-FY191, PSBs would need to raise core tier I capital of Rs 1.6-2.4 trillion and AT1 capital of 1.0-1.1 trillion during FY16-FY19. If GoI restricts its capital infusion plan to Rs. 0.7 trillion for FY16-FY19, several PSBs could have restricted growth leading to further pressure on their credit profile.
1Assuming PSBs maintain buffer of 0.5-1.0% over and above minimum regulatory requirement
