Fitch Ratings has revised the Outlook on the 'BBB-' Long-Term (LT) Foreign Currency (FC) Issuer Default Rating (IDR) of India-based financial institutions to Negative from Stable, while affirming the rating.

These include six government banks (including an international banking subsidiary of a government bank), two private banks, two wholly owned government institutions and one infrastructure finance company.

A list of affected entities is as follows:- State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), Bank of Baroda (New Zealand) Limited (BOBNZ), Canara Bank (Canara), IDBI Bank Ltd. (IDBI), ICICI Bank Ltd. (ICICI), Axis Bank (Axis), Export-Import Bank of India (EXIM), Housing and Urban Development Corporation Ltd. (HUDCO), Infrastructure Development Finance Company Ltd. (IDFC).

The rating action follows Fitch's revision of the Outlook on India's LT Foreign- and Local-Currency IDRs to Negative from Stable (please see rating action commentary dated 18 June 2012 at The Outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counterparties and holdings of domestic sovereign debt.

Should the Sovereign Long-Term IDR be downgraded, the banks with Viability Ratings (VR) of 'bbb-' would also be affected given the previously mentioned linkages. Separately, Fitch is also of the opinion that pressures are building generally on the stand-alone credit profile of these institutions which will negatively impact VRs, given India's weakening economic and fiscal outlook, slowing business reforms and inflationary pressures that in turn could put further pressure on their future asset quality. VRs of banks with concentrated exposures to problematic sectors could be impacted more.

Fitch derives some comfort from the banks' reasonable customer deposit base, established domestic franchises and adequate capitalisation. The non-banks, however, lack the funding advantage, which puts them more at risk during times of increased market volatility. In the agency's opinion, sovereign support for both the large banks and policy-type institutions is expected to remain strong, with the former benefiting from their large share of system assets and deposits and the latter from their association with the government. Consequently, Fitch expects the LT IDRs for the above two categories to be aligned to the sovereign's rating and also provide a Support Rating Floor close to, or at, the sovereign rating.


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