ICRA expects strong growth in banking sector ahead, revises outlook to positive
- In terms of profitability, ICRA expects it to remain strong although rising costs of deposits could limit the upside for banks.
Rating agency ICRA has revised its outlook for the banking sector to 'positive' on the back of strong credit growth, benign asset quality pressures, and the best capital and solvency position during the last eight years. ICRA expects the banking sector's profitability to remain strong going forward. However, the agency does believe that rising interest rates could hamper demand but will still remain healthy ahead. It expects asset quality to improve to a decadal best.
In its report dated December 19, ICRA stated that banks' credit growth is expected to remain strong in the near to medium term. However, it pointed out that rising interest rates could, however, temper demand next year, and still remain healthy in double digits.
ICRA sees liquidity conditions to remain tight going forward also as the wide gap between credit and deposit growth has reduced liquidity surpluses. That being said, ICRA expects banks' credit growth to slow down to between 11-16% in the financial year FY24, but, it expects the growth to be very healthy 15.2-16.1% in the current fiscal (FY23).
In terms of banking-wise, ICRA expects credit growth to be in the range of 13.4-14.1% for public sector banks in FY23 and then to be around 9.5-10.1% in FY24. While the rating agency has factored the credit growth to be 14.5-15.5% in FY23 and 12.6-13.5% in FY24 for private bankers.
In regards to asset quality, ICRA's note revealed that headline non-performing assets (NPAs) are now at multi-year lows for both public sector and private bankers. It added that most banks are better prepared to deal with any incremental stress arising out of the restructured book.
Going forward, ICRA expects gross NPAs and net NPAs to continue on a downward trend. While slippages are likely to be granular unlike bulky corporate slippages in past. However, ICRA also stated that the impact of rising interest rates and inflation or economic shocks are some of the key factors to look out for.
Notably, ICRA's vice president Aashay Choksey told reporters that from an asset quality perspective, the system's GNPAs (Gross Non-Performing Assets) will come down to 4% and net NPAs will be under 1%, as reported by PTI. The 4% gross NPA in FY24 will be the decadal best!
In terms of profitability, ICRA expects it to remain strong although rising costs of deposits could limit the upside for banks. The rating agency explained that while interest margins may compress, earning profile is to be supported by strong credit growth. Also, credit provisions to remain benign driving improved RoA/RoE.
Furthermore, the banking sector's capital and solvency position is the best during the last eight years, ICRA added that it is expected to improve further. According to the agency, limited regulatory or growth capital requirements for most of the banks, while the ability to raise capital from the markets has improved significantly.
In the December 2022 policy, RBI revealed that the average lending rate has gone up by 117 basis points in May-Oct, and the central bank is ready to infuse liquidity into the system. On year-on-year, money supply (M3) expanded by 8.9% as on November 18, 2022, while bank credit rose by 17.2%.
On the other hand, the weighted average domestic term deposit rate on fresh and outstanding deposits increased by 150 bps and 46 bps, respectively, between May to October, as per RBI.
Both interest rates on loans and deposits have gone further up after RBI's December policy.
On Monday, BSE BANKEX climbed by at least 265 points or 0.54% to end at 49,367.86. While Bank Nifty soared 194.25 points or 0.45% to close at 43,413.75.
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First Published:19 Dec 2022, 07:55 PM IST
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