Indian banks more stable but challenges remain: Fitch

New Delhi: Indian banks are stable but there will be challenges ahead for state-owned banks given weak core capitalisation and slow earnings recovery, Fitch said on Thursday.

"Capital-raising will be a key theme for Indian banks, as asset-quality pressures gradually stabilise and banks look to revive credit growth in support of a recovering GDP outlook," the rating agency said in a report.

"However, there will be challenges for state-owned banks in particular, given weak core capitalisation and expectations of slow earnings recovery due to high credit costs," it added.

Public sector banks require Rs 2.40 lakh crore capital by 2018 to meet global Basel III norms.

Fitch said state banks' large stressed asset stock should remain an overhang on banks' equity valuations for the foreseeable future, although the state's expected capital injection will provide a critical buffer for the near term

The gross Non-Performing Assets (NPAs) of Public Sector Banks rose to 6.03 per cent at the end of June, as against 5.20 per cent in March this year.

"Fitch believes that the banks will have to conduct much more capital raising to pursue sustainable growth rates while achieving Basel III requirements and cushioning balance-sheet stress at the same time," it said.

The report also features questions on related Indian banking themes such as AT1 issuance, domestic systemically important banks, and the recently announced reform measures for state-owned banks, the rating agency said.