Mumbai - US agency Fitch Ratings on Wednesday downgraded the Viability Rating (VR) of both state-run State Bank of India (SBI) and Bank of Baroda (BoB) by one notch, while affirming the 'BBB' Long-Term Issuer Default Ratings (IDRs) of SBI, BoB, Canara Bank and Bank of India with a stable outlook.
The American agency said the one notch VR downgrade of SBI to 'bb+' from 'bbb-' reflects the bank's vulnerable core capitalisation from its prolonged asset quality problems and weak earnings.
"Fitch has downgraded the Viability Rating (VR) of SBI and BoB by one notch to 'bb+' and 'bb', respectively, reflecting their weakened intrinsic risk profile due to the negative effect of persistently poor asset quality and earnings on their capital position," said a statement by Fitch, which has a negative sector outlook on Indian banks.
"The banks' core capital buffers also appear more vulnerable to moderate shocks."
The statement said that 19 of India's 21 state-run banks reported losses in the last financial year, cumulatively negating almost all of the government's $13 billion capital injections during the year.
"We believe more fresh capital is needed for growth and to manage heightened balance-sheet stress," Fitch said.
It pointed out that SBI's non performing loan ratio increased further to 11% which has increased risk for core capitalisation.
The one notch VR downgrade of BoB to 'bb' from 'bb+' reflects increasing pressure on its capital position from extended financial weakness in terms of its non-performing loans (NPLs) and earnings. The bank's NPL ratio in the last fiscal rose to 12.3%.
Bank of Baroda's portfolio of loans on the risk watch-list is around 2% and can add to asset quality pressure if NPL resolution slows, Fitch said.