Moody’s outlook on Indian banks remains stable as economic recovery paints positive picture ahead
Expecting the banking sector’s financial fundamentals to improve, according to Moody’s in its research note, lower loan loss provisions and higher net interest margins will boost banks’ profitability. Capitalization, funding and liquidity will be stable and support loan growth.
According to Moody’s, the operating environment for banks will be stable as the economy gradually recovers from the pandemic.
Moody’s expects India’s economy to continue to recover over the next 12 to 18 months, with GDP growing at 9.3% in the year ending March 2022 (FY2022) and 8.4% the following year.
He said: “Improving consumer and business confidence, as well as improving domestic demand, will support economic growth and demand for credit. However, the global economic fallout from the Russian-Ukrainian military conflict will create certain risks as they fuel inflation due to rising oil prices raising corporate interest rates and easing funding constraints on non-bank financial corporations, which are large borrowers from banks, will support the growth of ready.”
“We expect bank loan growth to accelerate to 12%-13% in fiscal 2023 from 5% in fiscal 2021,” Moody’s said in its note.
Moody’s sees banks’ asset quality improving with a decline in non-performing loan (NPL) ratios due to recoveries or write-offs of old problem loans, while the formation of new NPLs will be stable as the economy will recover.
Loan growth will help banks lower NPL ratios by expanding the overall pool of loans, although further defaults may stem from loans that have been restructured due to economic disruption from the pandemic, Moody’s points out.
The Moody’s rating said: “Corporate loan quality will be stable, supported by earnings growth and a cleanup of legacy corporate problem loans, while risks will persist in loans to retail and small and medium-sized borrowers. medium-sized businesses because the relief measures for them have somewhat masked stress among them.”
As of December 31, 2021, the asset-weighted average of the gross NPL ratios of rated banks has been reduced by almost half to 5.7%, compared to a peak of 10.3% recorded at the end of March 2018.
In addition, the banks’ capital will be stable. Moody’s said “improved profitability will offset increases in capital consumption due to an acceleration in loan growth, helping banks across the system to maintain capital at current levels. The ratios capital of public sector banks (PSBs) have improved over the past year, helped by capital In addition, the PSBs, together with their private sector banks, have proactively sought to raise capital on the equity market, taking advantage of improvements in profitability to attract investor interest.
At the end of 2021, rated private sector banks had an asset-weighted average Common Equity Tier 1 (CET1) ratio of 15.8%, which Moody’s says positions them well to seize opportunities. increase lending as economic conditions improve.
However, the capitalization of public banks remains lower than that of their private sector counterparts, but Moody’s also reports that their asset-weighted average CET1 has fallen from 10.0% as of March 31, 2021 to 10.5% of by the end of 2021. Additionally, Moody’s said, further improvements in the financial health of PSOs will continue to help them raise equity in the market, reducing their reliance on government capital support.
Profitability will improve due to growth in pre-provision earnings and lower provisions for loan losses.
According to Moody’s, gradual increases in national interest rates will increase net interest margins because banks will be able to pass on higher rates to borrowers, while their funding costs will rise slightly because banks have reduced the share of Term deposits from high-cost companies total deposits. Stable asset quality and existing provisions against old distressed assets will allow banks to reduce loan loss provisions. The return on assets of rated PSOs and private sector banks increased significantly to 0.6% and 1.5%, respectively, in the nine months to December 2021, from -0.4% and 0.7 % during the fiscal year ended March 2018.
Regarding funding and liquidity, Moody’s expects them to be stable for both public and private sector banks. Moody’s stresses that deposit growth will slow as businesses and individuals use excess liquidity for consumption and new business opportunities. Nevertheless, the increase in demand deposits and low-cost savings accounts will help banks keep funding costs stable even as interest rates rise.
For public sector banks, Moody’s believes government support will remain very strong. But in the case of private sector banks, the rating agency expects government support to vary depending on each bank’s systemic importance.
Finally, to resolve a struggling private sector bank, Moody’s expects the Reserve Bank of India to impose losses on holders of additional Tier 1 and Tier 2 securities before the government steps in to support its depositors. and its senior creditors.
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