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Fitch downgrades viability ratings of State Bank of India, Bank of Baroda

Fitch Ratings downgraded the viability ratings of State Bank of India and Bank of Baroda by one notch to reflect their weakened risk profiles due to the negative effect of poor asset quality and earnings on their capital position.

The rating agency said June 13 that it downgraded State Bank of India's viability rating to "bb+" from "bbb-," reflecting its vulnerable core capitalization from its prolonged asset quality problems and weak earnings. The rating also takes into account the bank's strong deposit franchise, which stems from its size, reach and close government links.

Fitch believes State Bank of India needs more fresh capital for growth and to manage heightened balance sheet stress.

Meanwhile, Fitch downgraded Bank of Baroda's viability rating to "bb" from "bb+," reflecting rising pressure on its capital position from extended financial weakness in terms of nonperforming loans and earnings.

The rating agency said that Bank of Baroda's capital flexibility is better than that of many public-sector peers, but the fact that it has not raised fresh capital has resulted in stagnating capital levels amid rising stress. Fitch added that the lender would likely require substantial fresh capital and government infusions if it is to achieve its growth objectives and mitigate balance-sheet stress.

Fitch also affirmed the long- and short-term issuer default ratings of State Bank of India, Bank of Baroda, Canara Bank and Bank of India at BBB- and F3, respectively, with a stable outlook on the long-term rating.

The long-term issuer default rating of Bank of Baroda (New Zealand) Ltd. was also affirmed at BBB-, while the viability ratings of Canara Bank and Bank of India were affirmed at "bb" and "b+," respectively.