Indian banks to require more capital as safeguard against stress: Fitch

Mumbai (Maharashtra) [India], August 1 : Indian state-owned banks' plans to raise capital from private sources will not be sufficient to mitigate anticipated risks unless supplemented with additional capital support from the government, according to Fitch Ratings.
Several large state banks have recently announced plans to raise a total of around USD 6 billion in fresh equity from the capital market. Government banks already face significant execution risks in raising equity due to depressed stock market valuations and weak investor interest.
Reports say the government's plan to reduce the number of state banks to five from 12 while selling majority stakes in several others to raise resources could add to uncertainties.
"A reduction in the state's majority shareholding in some of its banks may dent depositor confidence and potentially lead to negative rating action as their long-term ratings are anchored to state support," said Fitch.
It may also reduce investor appetite at a time when government capital support has stuttered. An acceleration in new coronavirus cases is hampering a meaningful economic recovery and increasing risks for banks' balance sheets.
"We believe the proposed stake sales will be very challenging in the current economic climate," it said. It could also require amendments to the banking company acts, which currently prescribe a minimum government shareholding of 51 per cent for the state banks, thus adding to execution risk.
Fitch expects state banks will remain reliant on fresh equity injections from the state as the proposed capital amounts, if raised fully, will likely add only around 100 to 150 basis points to state banks' existing common equity tier 1 (CET 1) ratios.
Under the high-stress scenario, this may provide some interim capital relief, testing the banks' ability to raise fresh equity on their own but will not be enough to stave off heightened solvency risks. It will also increase the prospect of further regulatory forbearance.
"We believe recapitalisation requirements will be substantially higher once pandemic-related asset quality deterioration starts manifesting on bank balance sheets when regulatory forbearance ends, in which case raising equity from the market will be more difficult," said Fitch.
Recent comments by the central bank governor highlighting the need for recapitalisation further underscores this imperative, emphasising the risks that deteriorating asset quality will pose to state banks' limited capital and earnings buffers.
This is consistent with the outcome of stress test on individual banks whereby the state banks have significantly larger capital shortfalls than their private counterparts.
Indian private banks' recapitalisation requirements are comparatively more modest than their proposed fresh capital raising with ICICI Bank and Axis Bank likely to add around 200 to 245 basis points to their existing CET 1 ratios.
This will further widen the capital gap between private and state banks which on average is about 350 basis points.
Fitch believes ICICI Bank and Axis Bank -- which have proposed plans to raise two billion dollars each -- will likely be encouraged by recent investor appetite for the almost one billion dollars and 1.9 billion dollars raised by Kotak Mahindra Bank and Yes Bank.
Yes Bank was also recently supported through an injection of capital by the largest state-owned bank, State Bank of India.