Global Funds See More Pain for Indian Banks After S&P Downgrade

  • Worried bad debts could be worse than expected: Western Asset
  • S&P cut three Indian public-sector banks to junk on Monday

Fund managers warn that the pain may not be over for Indian banks after S&P Global Ratings downgraded three lenders and Fitch Ratings said that the credit quality of public-sector lenders is under pressure.

Syndicate Bank and Bank of India had their debt scores cut to below investment level while Indian Overseas Bank was pushed deeper into junk territory on Monday by S&P, which cited the weakening asset quality of the three public-sector lenders. It also revised the outlook for Union Bank of India to negative.

India’s banks are saddled with $131 billion of impaired assets that threaten to stunt growth in an economy that’s expanded at the fastest rate among the world’s major nations. Western Asset Management Co. said that there are concerns that Indian banks’ bad loans could deteriorate in coming quarters.

“Is this the end or is there more to come?” said Swee Ching Lim, a portfolio manager at Western Asset in Singapore. “The worry is that there could be more NPL recognition beyond what has been disclosed at the public-sector undertaking banks and even at the private banks.”

Under Pressure

Syndicate Bank’s 3.875 percent bonds due 2019 have dropped to a more than two-month low at 101.7 cents on the dollar, according to prices compiled by Bloomberg. Bank of India’s 3.125 percent notes maturing in 2020 have also dropped near the lowest since March at about 98 cents.

Fitch said the credit profiles of public-sector lenders are under pressure as heavy losses in the last two straight quarters weaken their core capital adequacy, according to a report dated May 31.

PineBridge Investments said that the market had expected the ratings for public-sector banks to be under pressure, but the same isn’t the case for its private-sector peers that are well managed.

“I do not expect the private-sector banks’ asset quality will deteriorate at the same magnitude as the public-sector banks,” said Arthur Lau, co-head of emerging market fixed income at PineBridge in Hong Kong. However, “I don’t think we have seen the peak” for non-performing loans in the industry as a whole, said Lau, who is underweight on Indian bank bonds.

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