Global credit rating agency Moody’s Investor Services on 24 April upgraded the bank financial strength rating (BFSR) of eight Indian banks. It also took a re-look at Indian banks’ deposit ratings, but left them unchanged. The deposit ratings are an indication of a bank’s ability to pay its deposit obligations punctually.
The rating revision is a part of a global review of all its ratings across 1,000 banks in 90 countries. Moody’s, which kicked off the exercise in February 2007, has so far rated 13 Indian banks and all of them have Ba2 rating for their foreign currency bank deposits, which is not an investment grade. Twelve of these are commercial banks and the 13th is the Exim Bank of India that has no outstanding rating at this point of time. India’s sovereign bond rating, however, is investment grade, Baa3.
“The majority of Indian banks have benefited from a one-notch upgrade of their BFSRs due to their increasingly sound financial fundamentals and strong franchises, while their local currency deposit ratings, especially those of majority government-owned banks, have also benefited from a very high probability of systemic support in case of need,” a Moody’s release said.
BFSR represents Moody’s opinion on the safety and soundness of a bank. These ratings take into account financial fundamentals, franchise value, and business and asset diversification of banks. They do not take into account any external support either from a parent bank, regional government, co-operative or mutual banking group.
An analyst from a foreign bank, who spoke on the condition of anonymity, said: “The fact that Moody’s has re-rated mostly the government-owned banks is a vote of confidence of the functioning of these banks. Public-sector banks function under a lot of restrictions, ranging from the appointment of their senior managers to even decision on lending rates. Given the fact that none of these has changed, these banks have proved their health, without the government’s support,” he added.
Another banking analyst from a domestic brokerage said: “This re-rating does not come as a surprise. It was largely expected after another credit rating agency, Standard and Poor’s made India’s sovereign rating investment grade.”
S&P in January raised India’s sovereign credit ratings to BBB- from BB+ after 14 years. The upgrade to investment grade was an indication of India’s strong economic prospects and external balance sheet and its deep capital market, which supports a weak, but improving fiscal position.
These banks have been rated on a scale of A to E, A being the highest, indicating the bank is in the best of its health. In the current round of upgrade, the ratings of public-sector banks have moved a notch higher; the ratings on private-sector banks, however, have been kept unchanged at C-.
The highest of these ratings have been assigned to State Bank of India (SBI) and UTI Bank. Both have moved a notch higher from their previous ratings of D+ to C-. Banks rated C possess adequate intrinsic financial strength. Typically, they will be institutions with more limited, but still valuable business franchises. The remaining banks—Bank of Baroda, Bank of India, Canara Bank, Central Bank, Oriental Bank of Commerce, Punjab National Bank and Union Bank of India—have been upgraded to D+ to D.
Along with the financial strength rating, Moody’s also released a deposit rating of banks based on a refined joint default analysis (JDA), incorporating the potential for external support that reduced the riskiness of a bank’s deposit. In the Indian context, external support to a bank deposit comes in the form of deposit insurance up to Rs1 lakh for each depositor.
India’s largest commercial bank, SBI is the biggest beneficiary in the deposit rating. Its local currency deposit rating is A1, the highest among all Indian banks and most of its peers are rated at the A2 and A3 levels.