Friday, September 11, 2009
S&P: New Report Outlines Risks To South Asia Corp. Rtgs In 2009
The following is a press release from Standard & Poor's:
SINGAPORE (Standard & Poor's) Sept. 11, 2009--Although forward-looking indicators suggest that economic activity is now improving, operating conditions for the corporate and banking sectors in India may remain challenging in the near term, albeit to a lesser extent than that faced by the corporate and banking sectors in other regions, said Standard & Poor's Ratings
Services in two recently published report cards, titled "Country Risks, Challenging Economic Conditions To Drive Rating Actions For South Asian Corporates In 2009", and "Indian Bank Ratings Are Resilient To The Cyclical Downturn".
Currently, there is a strong negative bias in the ratings across the sector, with almost three-quarters of the rated portfolio now either on a negative outlook or on CreditWatch with negative implications. This is due to the negative outlook on the sovereign ratings on the Republic of India (BBB-/Negative/A-3), challenging operating conditions, and the weakened
financial profiles of the rated entities.
"More than two-thirds of Indian corporate credits are rated at speculative-grade level, with leverage in most sectors within the region increasing substantially in the past few years, mainly due to debt-funded acquisitions and large capital-expenditure programs," said Yasmin Wirjawan, credit analyst at Standard & Poor's. "Their financial risk profile could be under pressure should the global economic recovery be slower and shallower than the current expectations assume."
Within the backdrop of the economic slowdown, the Indian banks--particularly public sector banks--took advantage of one-time regulatory forbearance from the bank regulator, the Reserve Bank of India (RBI), to restructure a large proportion (estimated at 3% by June 2009) of their troubled loans, and avoided classifying them as nonperforming loans (NPLs). "If economic conditions remain tight, we expect that a significant proportion of these restructured loans may slip into NPLs over the next two years," said Standard & Poor's credit analyst Ritesh Maheshwari. He added, "We expect
declining margins in India's banking sector to stabilize, with a slightly downward bias, as the lending spreads have widened and pricing is more risk-based." The liquidity situation has been comfortable since November 2008, as a result of the loosening of the RBI's monetary policy. The sector's capitalization is adequate, but is slipping due to steady growth. The banks' standalone credit profiles have some tolerance for deterioration in asset quality and earnings compression. Indian banks are facing a cyclical downturn after more than six years of upturn, and Standard & Poor's Ratings Services expects the banks' asset quality to worsen moderately from historically low NPLs. Mr. Maheshwari said, "We currently rate the key banks the same as sovereign rating on India and, in line with the sovereign outlook, the outlooks on all the banks are negative."