Coronavirus effect: Moody's takes ratings action on 11 banks; downgrades SBI, HDFC, IndusInd, EXIM Bank

A day after downgrading India's sovereign rating, Moody's Investors Service on Tuesday took rating action on eleven Indian banks. These banks include State Bank of India, HDFC Bank, IndusInd Bank, Bank of Baroda, Punjab National Bank, Union Bank of India, Canara Bank, Bank of India, Central Bank of India, Indian Overseas Bank and EXIM Bank.

"Economic disruption caused by the coronavirus outbreak and the downgrade of the sovereign rating are the key drivers for today's rating actions," Moody's said.

The rating action on Indian banks follows Moody's recent downgrade of the Indian government's issuer rating to Baa3 from Baa2 with a negative outlook. Moody's has maintained India's macro profile, which serves as an input for the bank ratings, at moderate. The action indicates the impact on the Indian banks of the breadth and severity of the economic shock, and the deterioration in credit quality it has triggered, it said.

SBI, HDFC Bank and Exim India ratings downgraded

Moody's has downgraded the long-term local and foreign currency deposit ratings of State Bank of India, the country's largest lender, and HDFC Bank to Baa3 from Baa2, and the long-term issuer rating of EXIM India to Baa3 from Baa2. The agency also maintained their rating outlooks as negative.

"EXIM India's issuer ratings and SBI's deposit ratings are at the same level as the sovereign rating because of the uplift to their ratings, based on Moody's assumption that the two banks will receive government support in times of need. Consequently, the downgrade of the sovereign rating has led to the downgrade of their long-term issuer and deposit ratings to Baa3 from Baa2," the agency said.

Also Read: Moody's cuts India's sovereign rating to Baa3, maintains negative outlook

For EXIM Bank, Moody's has affirmed its ba3 Baseline Credit Assessment (BCA), as it believes the bank's strong capital provides a buffer to absorb incremental asset quality stress.

In the case of SBI, Moody's expects its asset quality and profitability to weaken, which could hurt its capitalisation. As a result, Moody's has placed its ba1 BCA under a review for downgrade.

As for HDFC Bank, the agency has cut its BCA to baa3 from baa2 given the strong linkages between the bank and the sovereign, including its large direct exposure to government debt and exposure to common underlying operating conditions. The negative outlook indicates Moody's expectation that HDFC Bank's ratings and BCA will likely move in tandem with India's sovereign rating.

BOB, BOI, CANARA AND UBI'S ratings under review for downgrade

Moody's has placed the ratings, BCAs, Counterparty Risk Ratings (CRR) and Counterparty Risk Assessment (CRA) of Bank of Baroda, Bank of India, Canara Bank and United Bank of India under review for downgrade. The review for downgrade reflects its expectation that the forward-looking improvements to the three bank's credit profiles that it had previously assumed will be more difficult in the current environment.

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IndusInd Bank rating downgraded

The rating of IndusInd Bank was downgraded to ba2 from ba1 in wake of the risks to bank's asset quality and profitability amid the deteriorating macro environment and financial market volatility. IndusInd Bank's funding is weak compared with other rated Indian banks, as reflected by its high deposit concentration and low share of retail deposits. This weaker funding makes the bank more susceptible to dislocations in financial markets, including in terms of wholesale funding sources, Moody's said.

Punjab National Bank's rating affirmed

In the case of Punjab National Bank, Moody's has affirmed its ratings and changed the outlook to stable from positive. It expects the strain on the asset quality and profitability, due to the coronavirus outbreak, will be largely mitigated by the improvements in the bank's credit profile over the past year. As such, Moody's expects the bank's BCA and ratings to remain stable at the current level, against its earlier expectation of an improvement to its BCA and ratings.

Central Bank of India and Indian Overseas Bank rating affirmed

In the case of Central Bank of India and Indian Overseas Bank, Moody's has affirmed their ratings and BCA with a stable outlook. The agency expects the asset quality and profitability pressures due to the coronavirus outbreak will be largely mitigated by the improvements in the banks' credit profile over the past year.

Rating Rational

According to Moody's, the Indian banking sector has been affected given the disruptions to economic activity from the coronavirus outbreak, which is weakening borrowers' credit profiles. The agency opined that disruptions from the COVID-19 pandemic will worsen the economic slowdown in India that has been underway in the past year and will accelerate deterioration in the banks' asset quality and profitability.

On stimulus measures, the agency said that relief packages announced by the Indian government and the Reserve Bank of India (RBI) since the start of the outbreak will help mitigate some of the credit pressures, but the longer and broader the economic slowdown, the more these banks will face asset quality and profitability issues. At the same time, heightened liquidity stress at non-bank financial institutions will pose a risk to the stability of the broad financial system, given banks' large direct exposures to these entities, it added.

Moody's expects the standalone credit profiles or BCAs of most rated public sector banks (PSBs) to deteriorate as the economic shock will strain their already weak solvency. Also, in the absence of external capital support from the Indian government, Moody's expects the capitalisation of the public sector banks to deteriorate. Despite the near-term asset quality, profitability and capital strain, it expects their funding and liquidity to remain a key credit strength.

For the private sector banks covered in this rating action, in Moody's opinion, their asset quality and profitability will also deteriorate driven by rising loan delinquencies and defaults due to the coronavirus outbreak, which will result in an increase in credit costs. However, most rated private sector banks have better loss absorbing capacity and stronger BCAs than their PSB peers because of stronger capitalisation and loan loss reserves, it said.