BackPrivate banks better placed than state banks in India: Fitch Ratings
Fitch says that Indian banks' impaired-loan ratio declined to 4.5% in the first nine months of financial year ended March 2023 (9MFY23), from 6% at FY'22.
PremiumThe financial performance of Indian banks' sustained improvement bodes well for the sector’s intrinsic risk profiles, global rating agency Fitch says.
According to rating agency, the pace of asset quality and profitability improvement has exceeded expectations. However, the capital buffers are broadly in line with the projections.
Fitch said that Indian banks' impaired-loan ratio declined to 4.5 per cent in the first nine months of financial year ended March 2023 (9MFY23), from 6 per cent at FY'22. This was nearly 60 basis points below Fitch's FY23 estimate, it added.
Citing the increased write-offs as a key factor, Fitch in its statement said that higher loan growth, supported by lower slippages and improved recoveries, have also played a role.
The rating agency expects a further improvement by FY23, however see banks to face the risk of asset-quality pressure associated with the unwinding of loan forbearance in FY24.
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"The sector's improving provision cover (9MFY23: 75 per cent, FY22: 71 per cent) also supports banks' ability to withstand risks, although private banks are significantly better placed than state banks due to their lower impaired loan ratio of 2.1 per cent, against state banks’ 5.6 per cent," it said.
Fitch further says compared with 1.26 per cent in FY22, sound economic momentum has contributed to a further drop in credit costs to 0.95 per cent in 9MFY23.
"Lower credit costs were the primary factor driving an improvement in return on assets to 1.1 per cent in 9MFY23, outpacing Fitch's FY23 estimate of 0.9 per cent, although earnings also benefited from higher-than-expected loan growth and improving net interest margins," it said.
Apart from this, the rating agency says without affecting FY24 profitability forecasts banks have reasonable tolerance to absorb pressure from credit costs and margin normalisation.
Pre-impairment operating profit at private banks, at 4.5 per cent of loans, offers greater headroom than the 3 per cent at state banks and supported private banks’ return on assets of 1.9 per cent, which far exceeded state banks’ 0.7 per cent, it added.
As per Fitch, sustained high loan growth, accompanied by rising risk density, could pressure capital. the sector's common equity Tier 1 (CET1) ratio rose by around 54 basis points in 9MFY23 to 13.3 per cent, alongside a 460 basis points drop in the net impaired loans/equity ratio to 9.6 per cent.
"There is further upside in bank performance and...this could persist for longer than we had initially expected, with Covid-19 pandemic-related risks largely in the background and a steady improvement in bank balance sheets over the past three years, in part due to forbearance," it said.
Sustained easing of financial-sector risks could support a higher operating environment score, but this will depend on our assessment of various factors, such as medium-term growth potential, borrower health and loans under regulatory relief, rather than just near-term bank performance, it said.
There is also a risk that continued strong loan growth may lead to selective or incremental increases in risk appetite, while net interest margin compression and higher credit costs post wind-down of regulatory forbearance could still weigh on financial profiles, it said.
Citing the rating upgrades, Fitch consider whether financial profile improvements are sustainable and exceed any additional risks taken.
With PTI inputs.
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