Moody's upgrades outlook for Indian banking system - Mint

Moody’s Investors Service has revised the outlook for the Indian banking system to stable from negative. Moody's expects India's economy to continue recover in the next 12-18 months, with GDP growing 9.3% in the fiscal year ending March 2022 and 7.9% in the following year. The pickup in economic activity is expected to drive credit growth, which Moody's forecasts to be 10%-13% annually. 

“Weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded," it said. 

In a report titled “Banking system outlook - India: Stabilizing asset quality and improved capital drive outlook change to stable", Moody's said: "The deterioration of asset quality since the onset of the coronavirus pandemic has been moderate, and an improving operating environment will support asset quality. Declining credit costs as a result of improving asset quality will lead to improvements in profitability. Capital will remain above pre-pandemic levels".

The deterioration of asset quality since the onset of the pandemic has been more moderate than expected despite relatively limited regulatory support for borrowers, Moody's said, adding that “the quality of corporate loans has improved, indicating that banks have recognized and provisioned for all legacy problem loans in this segment."

However, the quality of retail loans, according to the rating agency, has deteriorated, “but to a limited degree because large-scale job losses have not occurred."

Moody's expects asset quality will further improve, leading to decline in credit costs, as economic activity normalizes.

In the report, Moody's says, capital ratios have risen across rated banks in the past year because most have issued new shares. 

“Public sector banks' ability to raise equity capital from the market is particularly credit positive because it reduces their dependence on the government for capital. However, further increases in capital will be limited because banks will use most of retained earnings to support an acceleration of loan growth," it said. 

In addition, banks’ returns on assets will rise as credit costs will decline while banks' core profitability will be stable, it said. 

“If interest rates rise, net interest margins will increase, but it will also lead to mark-to-market losses on banks' large holdings of government securities."

 

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Moody's upgrades outlook for Indian banking system - Mint
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