Moody’s maintains stable outlook on Indian banks on improving financial fundamentals

Moody’s in its research note expects further improvement in the banking sector’s financial infrastructure, said a fall in debt-loss provisions and boosted net interest margin growth banks‘ Profitability. Capitalisation, funding and liquidity will remain stable and support credit growth.

In Moody’s opinion, the operating environment of banks will remain stable as the economy gradually recovers from the pandemic.

Moody’s expects India’s economy to continue to improve over the next 12-18 months, with GDP growing by 9.3% in the year ending March 2022 (Fiscal 2022) and 8.4% next year.

It said, “Improvement in consumer and business confidence, as well as improving domestic demand, will support economic growth and credit demand. However, the global economic fallout from the Russia-Ukraine military conflict will pose some risk as it is fueled by rising oil inflation. By reducing prices and the value of the local currency, which will increase the pressure on India’s central bank to raise interest rates. Increase corporate income and help non-bank finance companies, which are significant borrowers from banks. Reducing the funding shortfall will support credit growth.”

“We expect bank credit growth to accelerate from 5% in FY2023 to 12%-13% in FY2023 to 12%-13% in FY2023,” Moody’s said in its note.

Moody’s sees that the asset quality of banks will improve, with the non-performing loan (NPL) ratio declining due to recovery or write-offs of old problem loans, while the formation of new NPLs will stabilize as the economy recovers. Will happen.

Credit growth will help banks push down the NPL ratio by expanding the overall pool of loans, even though new defaults may arise from loans that have been restructured due to economic disruptions from the pandemic, Moody’s highlights.

The Moody’s note said, “The quality of corporate loans will be stable, supported by growth in earnings and a clean-up of old problem loans to corporates, while credit to retail borrowers and small and medium-sized enterprises will remain at risk as there is no need for relief for them.” The remedy is some degree of tension between them.”

As on December 31, 2021, the asset-weighted average to gross NPL ratio of rated banks nearly halved to 5.7% from the peak of 10.3% recorded at the end of March 2018.

At the same time, the capital of the banks will remain stable. Moody’s said, “The improvement in profitability will offset an increase in capital consumption due to a pick-up in credit growth, which will help banks across the system maintain capital at current levels. The capital to capital ratio in public sector banks (PSBs) There has been an improvement in the last one year, with the help of capital investment from the government.Also, the public sector banks as well as their private sector banks have taken advantage of the improvement in profitability to attract the interest of investors. Actively sought to raise capital from the capital market.”

As of the end of 2021, the asset-weighted average Common Equity Tier 1 (CET1) ratio of rated private sector banks stood at 15.8%, which, in Moody’s view, allows them to capture opportunities for increasing credit as economic conditions improve. Keeps in good condition.

Although the capitalization of state-owned banks is weaker than that of their private sector peers, Moody’s also states that their asset-weighted average CET1 increased to 10.5% by the end of 2021, from 10.0% as of March 31, 2021 . Adding, Moody’s said, further improvement in the financial health of public sector banks will continue to enable them to raise equity capital from the market, thereby reducing their dependence on capital support from the government.

Profitability will improve due to an increase in pre-provisioning earnings and a decline in debt-loss provisions.

According to Moody’s, a gradual increase in domestic interest rates will boost net interest margins as banks will be able to pass on higher rates to borrowers, while their funding costs will increase marginally as banks have increased overall high-cost corporate fixed deposits. share has been reduced. Deposit. Stable asset quality and existing provisions against old stressed assets will allow banks to reduce debt-loss provisions. Return on assets of rated PSBs and private sector banks rose to 0.6% and 1.5%, respectively, in the nine months ended December 2021 from -0.4% and 0.7% in the financial year ended March 2021.

With respect to funding and liquidity, Moody’s expects them to remain stable for both public and private sector banks. Moody’s highlighted that deposit growth will slow as corporates and individuals use the excess cash for consumption and new business opportunities. Nevertheless, the increase in low-cost current and savings account deposits will help banks keep funding costs stable despite the rise in interest rates.

Moody’s believes government support for public sector banks will continue to be very strong. But in the case of private sector banks, the rating agency expects government support to vary depending on the systemic importance of each bank.

Finally, to resolve a crisis-ridden private sector bank, Moody’s expects the Reserve Bank of India to pass losses on holders of additional Tier 1 and Tier 2 securities before the government moves to support its depositors and senior creditors. .