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TEXT-Fitch:Most Indian banks resilient to rising asset quality stress

(The following statement was released by the rating agency)

Oct 08 - Fitch Ratings says in a new report that it expectsIndian banks to face sustained asset quality weakness over the next few quartersalthough most have a reasonable buffer to withstand increased stress. Fitchexpects the banking system's gross non-performing loans (NPL) ratio to reach4.2% in the financial year to March 2013, up from a previously estimated 3.75%.

Asset quality is likely to remain under pressure at least for the next three tofour quarters, particularly from the infrastructure sector in which banks'exposures are concentrated. Fitch believes that bulk of the stress ininfrastructure is residing in restructured assets and will not be visible in thereported NPL numbers where pressures are largely cyclical. Restructured assetsin FY12 were significantly higher than during the last restructuring exercise inFY09. Fitch believes that stressed assets (including restructured assets) forthe system will likely exceed the agency's 10% estimate for FY13.

Infrastructure remains a key industry for the Indian government, whose supportto a large extent mitigates the viability risk for many such projects and maylimit eventual credit losses. This is evident in the government's recentlyannounced reforms for struggling state power utilities (around 3% of totalsystem loans). The long-term solution, however, lies in restoring the financialviability of state utilities which carries high execution risk given thepolitical sensitivity around tariff hikes.

Fitch's stress test on Indian banks suggests reasonable resilience in the Indianbanking system to absorb a higher level of stress. Core equity for most banks isunimpaired as both profits and general reserves remain adequate. Most largegovernment and private banks have passed the stress test. Few banks with highasset concentration and weak equity are more vulnerable, in particularmedium-sized banks. This leaves their Viability Ratings vulnerable to downgradeif exposure to stressed assets continues to rise without a correspondingincrease in equity buffer.

Funding is a traditional strength and supports the stand-alone credit profilesof banks, with deposits accounting for bulk of the total funding. Reliance onshort-term funding has been increasing, and is most evident at smallergovernment banks with concentrated regional franchises. Government ownership andexcess repo-able securities to a large extent mitigate refinancing risk.Moreover, the government's recent directive to government banks to graduallyreduce this dependence will be credit-positive.

Capitalisation at government banks is supported by the government's owncommitment towards a minimum Tier 1 ratio of 8%. The government has budgetedaround INR160bn for bank recapitalisation in FY13 and has worked on a 10-yearrecapitalisation plan for government banks. Meeting the large capitalrequirements under Basel III, if not planned well, could also see numerous bankscompeting to raise funds on the capital market at the same time given that therequirement is mostly back-ended in FY16-FY18. However, banks with strongercredit profiles should be able to attract capital easily relative to the weakerones.

The special report titled "2013 Outlook: Indian Banks, NPLs to Rise: Stress TestHighlights Largely Intact Core Equity " is available on orby clicking on the link below.

Link to Fitch Ratings' Report: 2013 Outlook: Indian Banks

((Bangalore Ratings Team, Hotline: +91 80 41355898, Bhanu.priya@thomsonreuters.com,Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))