State-owned Banks to Need More Capital to Safeguard Against Stress: Report

The plans of state-owned banks to raise capital from private sources will not be sufficient to mitigate anticipated risks unless supplemented with more capital support from the government, Fitch Ratings said on Monday. Several large state banks have recently announced plans to raise a total of USD 6 billion in fresh equity from the capital market.

Fitch said state banks already face significant execution risks in raising equity due to depressed stock market valuations and weak investor interest. "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 state," Fitch Ratings said.

It said 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. It may also reduce investor appetite at a time when government capital support has stuttered, and 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 and in light of the potential capital shortfalls we calculate at the state banks in our stress test. 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 said. The rating agency expects that state banks will remain reliant on fresh equity injections from the government as the proposed capital amounts, if raised fully, will likely add only around 100-150 basis points to state banks' existing common equity Tier 1 (CET1) ratios.

"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," Fitch said.