Downgrade Rating Of Banks Begins--None Can Stop Further Damage

     Moody's downgrades Bank of Baroda, Canara Bank and Union Bank Economic Times

MUMBAI: Ratings firm Moody's has downgraded a variety of ratings for three major public sector banks- Bank of Baroda,Canara Bank and Union Bank.

Besides downgrading their bank financial strength ratings or BFSRs and the issuer ratings, it has also downgraded by one notch their local currency deposit ratings.

The foreign currency deposit ratings are however affirmed the same for the three banks and a fourth public sector bank- and Punjab National Bank.

The outlook on the BFSRs is negative, except for Punjab National Bank whose BFSR has a stable outlook. Moody's has affirmed the ratings of Union Bank of India, but changed the outlook on its BFSR to negative.

After these rating actions, the affected banks exhibit the following local and foreign currency deposit ratings, BFSRs and BCAs with corresponding outlooks.

- Bank of Baroda (BOB, Baa3/Baa3/stable -- D/ba2/negative)

- Canara Bank (Canara, Baa3/Baa3/stable -- D/ba2/negative)

- Union Bank of India (UBI, Baa3/Baa3/stable -- D/ba2/negative)

- Punjab National Bank (PNB, Baa3/Baa3/stable -- D-/ba3/stable)

Ratings rationale

The downgrades primarily reflect the challenges of the current macroeconomic environment, which have been exacerbated by the depreciating rupee and high levels of inflation.

The Reserve Bank of India measures to support the currency have not reversed the depreciation, implying that interest rates may remain elevated for a longer time.

Against such a backdrop, Moody's expects public sector banks in particular to find difficulty in responding to slower economic growth, deteriorating asset quality, and declining margins.

The ratings firm has said that Indian public sector banks continue to report deteriorating asset quality with impaired loans ratios above 8% and loan loss reserves coverage for these impaired loans under 25% as of end-March 2013.

These problem assets indicate a risk that capital ratios will remain under pressure; a situation which is compounded by the relatively low capacity of the banks for internal capital generation.

Therefore, given their weak financial performances, several public sector banks have received repeated capital injections from the government in past years.

For the fiscal year ending March 2014, the Indian government (Baa3/stable) has prepared INR140 billion (USD 2.3billion) in its budget to raise bank capital levels, and we expect recipients will include the four mentioned in this press release.

http://articles.economictimes.indiatimes.com/2013-08-16/news/41417843_1_foreign-currency-deposit-ratings-punjab-national-bank-union-bank                                    Moody's dowgrades PNB, Canara Bank, Bank of Baroda

Rupee slide, high inflation stated as cause of downgrade

Moody’s has downgraded the baseline credit assessments (BCA) for three public sector banks – Punjab National Bank, Bank of Baroda and Canara Bank - on the adverse economic environment. 

The challenges have been aggravated by the depreciating rupee and high levels of inflation.
 

Reserve Bank of India’s steps to support Indian rupee has not reversed its slide. As a consequence, interest rate may stay elevated for a longer period.
 

Since rupee value against US dollar has slide by 11.2 per cent from Rs 55.48 (May 22, 2013) to Rs 61.71 (August 16, 2013), according to Bloomberg data.

Rating agency cut BCA rating for PNB by two notch from “ba3” to to “ba1”. In the case of Bank of Baroda and Canara Bank rating was cut by one notch to ba1. Moody’s assigned the negative outlook to Union Bank of India’s BCA while affirming its ba2 rating.

Banks especially public sector banks will face difficulty dealing with slower economic growth, deteriorating asset quality, and declining margins, Moody’s said in statement.

Meanwhile global financial services firm Macquarie said Recovery now is a mirage. Mere announcements or lip service from the Government doesn’t entail recovery. Cases being referred to Cororate Debt Restructuring (CDR) continue to remain very high. 

Most large assets restructured earlier aren’t performing well (implying larger defaults from restructured assets) and the “big names” in the business amounting close to Rs 2,00,000 crore of debt (3% of system assets) are yet to be restructured and will come up over the course of the next few years. 

The Slippages as they season are likely to entail more provisions. Stressed assets (un-provided) as a per cent of net-worth now stand at an alarming high level of 100% for state-owned banks compared to 6 per cent for private banks, Macquarie added.

Moody’s pointed out PSB’s continue to report deteriorating asset quality. Their impaired loans ratio’s (gross non-performing loans (NPLs) plus restructured loans as a percentage of gross loans) was above eight per cent (End of March 2013). 

The loan loss reserves coverage for these impaired loans under 25 per cent as of end-March 2013.

Moody’s said the capital ratios will remain under pressure. The situation is compounded by the relatively low capacity for internal capital generation.

Moody’s said the government has injected capital many times in public sector banks due to their weak financial performance. It (government) has prepared plan to invest Rs 14,000 crore ($ 2.3 billion) during 2013-14 in banks to raise their capital levels.

Though these capital injections have not taken place under extreme conditions, they do point to business models that are not self-sustaining from a financial perspective.

In June 2013, the agency had placed Indian banks' ratings (on subordinated and junior subordinated debt) on review for downgrade. It was done due to change in methodology to assess systemic support for bank subordinated debt.

http://www.business-standard.com/article/finance/moody-s-dowgrades-pnb-canara-bank-bank-of-baroda-113081600434_1.html

SBI leads downwards

Public sector banks' poor performance needs better response

State Bank of India (SBI) has put in a poor performance in the first quarter of the current financial year, going by more than one parameter. Not only has its bottom line dropped by 13.6 per cent (year on year), its asset quality has also deteriorated - the gross non-performing asset (NPA) level has gone up by 57 basis points to reach 5.56 per cent. In the past, when provisioning was raised to take care of the rise in NPAs, it could be argued that the balance sheet was healthier than what the bottom line indicated. That cannot be said about the latest numbers. The provisioning cover has deteriorated by nearly four percentage points to 60.6 per cent. 

SBI's poor performance would not have raised serious concern if it had been out of line with that of other public sector banks. But many of them have underperformed in varying degrees, with their total NPAs going up by a significant 13.5 per cent in a single quarter, that is sequentially. The fact that the new private sector banks have become a category apart and manage to buck the overall economic downturn tells its own story. All this has again brought to the forefront the issue of whether public money is best used in remaining invested in public sector banks, particularly when the government will need to pump in an additional Rs 90,000 crore in the next five years to enable them to meet Basel III capital adequacy norms, while retaining its existing stake. 

Two specific suggestions have been made in the last few days. One is by the financial services secretary that banks should push for a change in the management of borrowing firms that are wilful defaulters. He has topped this up with the observation that banks are sometimes too lenient in cases leading to non-performance and restructuring. While the former is unexceptionable, the latter is a well-known reality. But raising these points will not make a difference. It is well known that public sector banks mollycoddle business borrowers for a combination of reasons. But most important perhaps is that many borrowers are politically powerful enough to exert undue influence on the terms of their repayment, especially to public sector banks. A lot of corporate debt restructuring, which involves an element of write-off, can be traced to the clout of the borrower.

As for the regulator, the governor of the Reserve Bank of India has drawn attention to the unequal size of different public sector banks - with the second-biggest being one-third the size of the first - and suggested that there should be four or five banks of similar size to prevent a monopolistic situation. Right now there is no dearth of competition among public sector banks and this is unlikely to change if some of the larger banks merge with troubled smaller banks. Where all commercial banks fall down is in their inability to take financial inclusion further, thus leaving many poor people at the mercy of dubious deposit takers

http://www.business-standard.com/article/opinion/sbi-leads-downwards-113081401386_1.html

Read old blogs in this regard
http://importantbankingnews.blogspot.in/2013/07/yes-sir-culture-is-poison-for-banks-as.html

http://importantbankingnews.blogspot.in/2012/09/bad-loans-in-banks-are-beyond-control.html

All is not well with public sector banks, It is not correct to blame Global recession for such critical position of banks, it is simply the large scale corruption and flattery culture prevalent in bank.'
http://dkjain497091112006.blogspot.in/2012/05/all-is-not-in-government-banks.html

http://dkjain497091112006.blogspot.in/2013/07/future-of-psu-banks-will-be-like-bsnl.html