OREANDA-NEWS. Fitch Ratings has affirmed the ratings on nine Indian banks. The Long-Term Issuer Default Ratings (IDR) on State Bank of India (SBI), Bank of Baroda, Bank of Baroda (New Zealand) Limited (BOB NZ), Punjab National Bank (PNB), Canara Bank, IDBI Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. have been affirmed at 'BBB-' while Indian Bank has been affirmed at 'BB+'. The Outlook on the IDRs is Stable.

PNB's Viability Rating (VR) has been downgraded by one notch to 'bb' to reflect the growing risk to the bank's capital position from its mounting stock of stressed assets, which has risen at a faster rate than its capital replenishment. The downgrade also reflects Fitch's expectation that capital buffers are unlikely to improve significantly even though the state is likely to inject capital into the bank in the financial year ending 30 March 2016 (FY16), with the bank's large stressed assets stock potentially taking longer to resolve than that of its peers.

A full list of rating actions is at the end of this rating action commentary.

The outlook for Indian bank credit profiles in FY16 is more positive following the difficult year in FY15, when system-wide loans increased by 9.7%, the slowest pace in a decade. There are, however, challenges from stressed sectors such as infrastructure and steel, high corporate leverage, and continued pressure on asset quality and capital. Fitch cut its India real GDP growth forecasts to 7.8% for FY16 from 8.0%, and to 8.1% for FY17 from 8.3%. State-owned banks account for 85% of the total capital shortfall that Indian banks face in meeting Basel III capital requirements, and they account for close to 90% of the system's stressed assets.

A seven-part plan to reform India's state-owned banks could be a significant step towards increased transparency, better governance and greater accountability for the sector, provided government interference is minimised. The plan aims to reward capital efficiency and operational productivity and signals a move away from the previous system, which strongly emphasised asset and deposit growth.

The announcement of a INR700bn (USD10.7bn) capital injection in state banks by FY19 (with INR250bn in FY16) should provide some support for the state-owned banks' ailing balance sheets, but may not be sufficient, depending on banks' credit growth expectations and persistent low equity valuations. Indian banks' stressed asset ratio rose to 11.1% in FY15 from 10% in FY14. The same ratio for state banks rose to 13.5% from 12% in FY14.

KEY RATING DRIVERS

IDRS, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
The Long-Term IDRs of SBI, Bank of Baroda, PNB, Canara Bank, IDBI Bank, and ICICI Bank are at their SRFs of 'BBB-'. The ratings are driven by their SRs of '2', which reflects Fitch's expectation that they are highly likely to receive extraordinary support from the Indian government, if needed, due to their high systemic importance and the government's majority ownership in all except ICICI Bank. Indian Bank - which is also state-owned - has an IDR and an SRF that are a notch lower than the large state-owned banks', driven by its lower SR. Indian Bank's SR of '3' reflects the moderate probability that it would receive extraordinary support from the Indian government, if needed, because of its lower systemic importance stemming from its smaller size and more regional character.

Axis Bank's IDR is driven by its VR of 'bbb-' while its SRF and SR are lower at 'BB+' and '3', respectively, mainly due to its private ownership.

The VRs of SBI, ICICI Bank, Axis Bank and Indian Bank are at the same level as their IDRs and therefore, also act as drivers for their long-term ratings.

BOB NZ is a fully owned subsidiary of Bank of Baroda and its IDR is driven by expectations of high support from its parent due to the strong linkages with the latter.

The 'Stable' Outlook on the IDRs mirrors the Outlook on India's sovereign rating (BBB-/Stable). It reflects our expectation that there is no change in the sovereign's ability to support its banks in a situation of extraordinary stress, if needed. For SBI, ICICI Bank, Axis Bank and Indian Bank, it also reflects a certain degree of stability in their standalone credit profiles, which are also drivers for their IDRs.

VIABILITY RATING (VR)
The affirmation of VRs of most banks factor in a slower rise in NPLs and expectations of government capital injections in the state banks (INR250bn each in FY16 and FY17). It also reflects our view that asset quality would not deteriorate materially from current levels. The VRs of certain banks, whose stressed assets have increased at a significantly faster pace than capital, will continue to be under pressure, and their stressed assets are likely to make the recovery process more protracted than expected.

SBI, ICICI Bank and Axis Bank are the only rated Indian banks to have investment-grade VRs of 'bbb-', reflecting their superior standalone credit profiles. The VRs of privately held ICICI Bank and Axis Bank reflect their significantly stronger capital metrics and relatively benign asset quality, although NPLs have increased. They are also supported by their strong earnings, robust funding profile and better management quality. Both ICICI Bank and Axis Bank have accessed equity capital markets at timely intervals and have made improvements in retail funding.

SBI's VR of 'bbb-' benefits from its large scale and status as a quasi-sovereign entity, which results in a solid funding profile and strong access to capital markets. It also reflects SBI's gradually improving asset quality and expectation of capital replenishment in FY16. The government's capital injection of around INR55bn (around USD880m) and the bank's plans to raise around USD2.5bn-3bn via equity issuance (last issuance: USD1.6bn in FY14) in FY16, should provide some uplift to capital ratios and buffer any potential risks from asset quality. SBI reported a stable stressed asset ratio of 8.4% in FY14, despite sharply lower loan growth, and was the only state bank to report an absolute decline in gross NPLs.

The VRs of Bank of Baroda and Canara Bank are one notch lower at 'bb+', although Bank of Baroda's performance has been better than Canara Bank's in terms of capitalisation and exposure to stressed business sectors. Both have received regular capital injections from the government, but capital vulnerability is higher for Canara Bank due to its greater exposure to stressed sectors. Canara Bank reported a 140bp increase in gross NPL ratio to 3.9% in FY15 as a sharp increase in new NPLs offset the rise in recoveries and upgrades. Its stressed asset ratio rose to 10.6% from 9.2% in FY14, but remains lower than the state banks' average. The VR affirmation factors in the likely INR9bn core capital injection from state in FY16 and builds in expectation that Canara Bank will raise Additional Tier 1 equity of INR30bn, as planned.

Indian Bank's VR, which is also at 'bb+', reflects concerns about its rising stressed asset ratio (FY15: 12.1%), which is partly mitigated by its stable and superior capitalisation (Fitch Core Capital (FCC) ratio of 12.6% in FY14) among state banks, declining concentration risks and slower loan growth.

PNB's VR of 'bb' reflects risks from the continued rise in its stressed asset ratio of around 16%, which is well-above the state banks' average. Given macroeconomic uncertainties, there remains risk of more rises that could further compromise already-thin capital buffers. This is despite the fact that the increase in new NPLs has slowed in recent quarters and the pace of recoveries has been on the rise. PNB's unreserved NPLs (assuming 20% mortality from restructured loans) to equity remains high even after the core capital injection of INR17.3bn (around USD280m; 4.4% of PNB's FY15 equity) expected from the government is factored in. Fitch believes that the bank's recovery could prove to be more protracted than other similar-sized peers because of these stressed assets.

IDBI Bank's VR, which is also at 'bb', is also vulnerable to a downgrade given deterioration in the stressed asset ratio to 13.6% in FY15 from 11% in FY14, and a traditionally thin capital buffer (FCC ratio of 7.6% in FY14) and higher exposure to stressed sectors. IDBI's VR affirmation reflects the positive impact that the government capital injection of INR22.3bn (around USD355m; 9% of FY15 equity), the bank's slower loan growth and its greater focus on retail and priority-sector loans are likely to have on its capital buffers.

SENIOR DEBT, SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The senior debt ratings of SBI, Bank of Baroda, IDBI Bank, ICICI Bank, Axis Bank and Canara Bank are at the same level as the IDRs as the debts represent unsecured and unsubordinated obligations of the banks.

Legacy Upper Tier 2 bonds are rated four notches below the VR for ICICI Bank, and three notches below the VR for Bank of Baroda and Canara Bank. The notching is in accordance with Fitch's assessment of each instrument's non-performance and loss-severity risk profiles. These subordinated debts are legacy instruments that are not Basel III-compliant.

SBI's legacy perpetual Tier 1 bonds are rated five notches below its VR in accordance with Fitch's assessment of the instrument's non-performance and relative loss-severity risk profile. This legacy hybrid debt is not Basel III-compliant.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT
The VRs on Bank of Baroda, PNB, Canara Bank and IDBI Bank are lower than their SRFs and their IDRs may be downgraded if factors underpinning the SRFs weaken. For SBI, ICICI Bank and Indian Bank, where the VRs and SRFs are at the same level, their IDRs would only be downgraded if both the SRFs and the VR were to be downgraded. A downgrade of India's sovereign rating (BBB-/Stable) will trigger a downgrade of all the banks' IDRs, which are currently at the same level as the sovereign. Likewise, a change in the sovereign's outlook will also lead to a revision of the outlooks on banks' IDRs. Axis Bank's IDR is solely driven by its VR and a downgrade to its VR, while unlikely in the near term, will lead to a downgrade to its IDR.

Any changes in the banks' IDRs would result in equivalent changes in their senior debt ratings.

VRS, SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The 'bbb-' VRs of the private banks, ICICI Bank and Axis Bank, are sensitive to any major change in the operating environment and unexpected asset quality deterioration. However, the VRs will be stable as long as the banks maintain adequate capital buffers. The VRs of ICICI Bank and Axis Bank would move down in line with a downgrade of the sovereign rating.

SBI's VR is sensitive to unexpected deterioration in capitalisation and/or asset quality. The VR of SBI will be also sensitive to downward movement in the sovereign rating or outlook.

The VRs of Bank of Baroda, Canara Bank, PNB and Indian Bank are sensitive to rising pressures on capitalisation and asset quality. Bank of Baroda's VR is stable at the current level due to better capital metrics and lowest exposure to stressed sectors among peers. The VRs of Bank of Baroda, Canara Bank and Indian Bank factor in government capital increases, the absence of which could undermine capital buffers if asset quality continues to weaken sharply. That said, Indian Bank's capital tolerance is superior to that of Canara Bank.

PNB's VR would be vulnerable to continued material deterioration of its asset quality from current levels (though this is not expected under Fitch's base case), if it is not matched by adequate capital reinforcement.

Downward pressure on IDBI Bank's VR could emerge if the pronounced deterioration in stressed assets continues without adequate addition in capital.

The banks' Upper Tier 2 and hybrid Tier 1 debt are all notched down from the VRs and will be sensitive to any change in the VRs.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SRs and SRFs are determined by the agency's assessment of the government's propensity and ability to support a bank, based on the bank's relative size and systemic importance. A change in the government's ability to provide extraordinary support due to a change in the sovereign ratings would affect the SRs and SRFs. The SRs and SRFs will also be impacted by any change in the government's propensity to extend timely support.

The rating actions are as follows:

SBI:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at F3'
- Viability Rating affirmed at 'bbb-'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'
- USD5bn MTN programme affirmed at 'BBB-'
- USD3.5bn senior unsecured notes affirmed at 'BBB-'
- USD400m perpetual tier 1 bonds affirmed at 'B'

PNB:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at 'F3'
- Viability Rating downgraded to 'bb', from 'bb+'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'

Bank of Baroda:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at 'F3'
- Viability Rating affirmed at 'bb+'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'
- USD3bn MTN Programme 'BBB-'
- USD500m senior notes under MTN programme affirmed at 'BBB-'
- USD350m senior notes under MTN programme affirmed at 'BBB-'
- USD1bn senior unsecured notes under the MTN programme affirmed at 'BBB-'
- USD300m Upper Tier 2 notes under MTN programme affirmed at 'B+'

BOBNZ:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Support Rating affirmed at '2'

Canara Bank:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at 'F3'
- Viability Rating affirmed at 'bb+'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'
- USD2bn MTN programme affirmed at 'BBB-'
- USD350m of senior notes under MTN programme affirmed at 'BBB-'
- USD500m of senior notes under MTN programme affirmed at 'BBB-'
- USD250m Upper Tier 2 notes under MTN programme affirmed at 'B+'

IDBI Bank:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at 'F3'
- Viability Rating affirmed at 'bb'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'
- USD5bn medium-term note programme affirmed at 'BBB-'
- SGD250m senior unsecured notes affirmed at 'BBB-'
- CNY650m senior unsecured notes affirmed at 'BBB-'
- CHF110m senior unsecured notes affirmed at 'BBB-'
- USD1bn senior unsecured notes affirmed at 'BBB-'
- USD300m senior unsecured notes affirmed at 'BBB-'

Indian Bank
- Long-Term IDR affirmed at 'BB+'; Outlook Stable
- Short-Term IDR affirmed at 'B'
- Viability Rating affirmed at 'bb+'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB+'

ICICI Bank:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at 'F3'
- Viability Rating affirmed at 'bbb-'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'
- USD5.7bn senior notes affirmed at 'BBB-'
- USD1.5bn Upper Tier 2 bonds affirmed at 'B+'

Axis Bank:
- Long-Term IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term IDR affirmed at 'F3'
- Viability Rating affirmed at 'bbb-'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB+'
- EUR3bn MTN programme affirmed at 'BBB-'
- USD2.3bn senior unsecured notes affirmed at 'BBB-'