Moody’s takes rating action on 11 Indian banks, downgrades SBI, Exim & HDFC Bank

Moody’s said disruptions from the coronavirus outbreak 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. While the government and regulatory efforts will help the system, Moody’s believes “the longer and broader the economic slowdown, the more these banks will face asset quality and profitability issues.”

Moody’s noted that EXIM India's issuer ratings and SBI's deposit ratings are at the same level as the sovereign rating. Therefore, India’s sovereign rating downgrade has led to the downgrade of their long- term issuer and deposit ratings to Baa3 from Baa2.

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 capitalization. As a result, Moody's has placed its ba1 BCA under a review for downgrade.

As for HDFC Bank, Moody's has downgraded 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, it said. Moody's has also downgraded HDFC Bank's long-term deposit ratings to Baa3 from Baa2 reflecting the downgrade of the sovereign rating. The negative outlook indicates Moody's expectation that HDFC Bank's ratings and BCA will likely move in tandem with India's sovereign rating.

Moody's has placed ratings, BCAs, Counterparty Risk Ratings (CRR) and Counterparty Risk Assessment (CRA) of BOB, BOI, Canara and UBI under review for downgrade. This reflects Moody's expectation that the forward-looking improvements to these banks’ credit profiles that Moody's had previously assumed will be more difficult in the current environment.

IndusInd's BCA rating has been downgraded to ba2 from ba1. This incorporates the risks to bank's asset quality and profitability amid the deteriorating macro environment and financial market volatility, Moody’s said. The agency said that IndusInd's weak funding, as reflected by its high deposit concentration and low share of retail deposits, makes the bank more susceptible to dislocations in financial markets.

Moody's expects the strain on PNB’s asset quality and profitability to be largely mitigated by the improvements in its credit profile over the past year. The rating agency has affirmed PNB's ratings and changed the outlook to stable from positive.

In the case of CBI and IOB, Moody's expects the asset quality and profitability pressures due to the coronavirus outbreak will be largely mitigated. This, Moody’s believes, is due to improvements in the banks' credit profile over the past year. Moody's has affirmed CBI and IOB's ratings and BCA with a stable outlook.