The government’s plan to infuse Rs 2.11 lakh crore into struggling state-run banks over two years is credit positive for three public sector lenders, Moody’s said in a report revising their outlook.
Moody’s has changed the outlook to stable from negative for Bank of India and its London and Jersey branches, Union Bank of India and its Hong Kong branch, and Oriental Bank of Commerce, according to a media statement. The agency also affirmed the ‘Baa3’ rating of Bank of India and Union Bank’s unsecured debt, which indicates a moderate credit risk.
According to the rating agency, the government’s planned fund infusion is large enough to help improve the capitalisation level of the banks. A bulk of the capital – Rs 1.35 lakh crore – will come via the issue of recapitalisation bonds, and the remaining Rs 76,000 crore, which includes Rs 18,000 crore already allocated under the Indradanush Recapitalisation Scheme, will come through budgetary support and market borrowings over two fiscal years.
Moody’s expects that the amount raised from recapitalisation bonds to be sufficient for all public sector banks to maintain some buffer over the minimum 8 percent Tier-1 capital requirement by end of fiscal 2019 under the Basel III banking norms.
The plan is intended to help banks make adequate provisions against bad loans and revive lending, Moody’s said. This, in turn, will help banks improve their capacity to take haircuts on those assets in a resolution process, it added.
In addition, as their credit profiles improve, Moody’s expects that some banks will be able to raise capital from the equity markets, which will further support their capitalisation profiles. The government’s capital infusion plan also alleviates some of the risks of a ratings downgrade, the statement added.
Prior to the revised outlook, the credit profiles of the three banks were under pressure due to asset quality deterioration as well as Moody’s expectation of lower profitability.
- Moody’s has affirmed the senior unsecured MTN program rating at (P)Baa3 and the senior unsecured debt rating at Baa3 for debt issued by Bank of India and its London and Jersey branches.
- It has affirmed the senior unsecured MTN program rating at (P)Baa3 and the senior unsecured debt rating at Baa3 for debt issued by Union Bank and its Hong Kong branch.
- Moody’s also affirmed the standalone credit profiles or baseline credit assessments (BCA) of these three banks at ba3, implying a significant credit risk.
- The rating agency also affirmed the subordinate MTN program rating at (P)Ba3 for Bank of India and its London and Jersey branches, and Union Bank and its Hong Kong branch.
- For Bank of India, Moody's has affirmed it’s preferred stock non-cumulative rating at B3(hyb). For Union Bank and its Hong Kong branch it has affirmed the junior subordinate MTN program rating at (P)B1.