The Hindu Business Line : Rising rates may dent banks' profits, not capital base: Fitch

INTERNATIONAL credit rating agency Fitch has said that although the profits and earnings of most Indian banks may be affected as a result of a decline in trading profits, due to the recent volatility in interest rates, their capital positions are unlikely to be impaired.

In a comment titled `Market Risk for Indian Banks: Profits Under Pressure but Capital Should Stay Intact', Fitch has said that while the increase in interest rates has highlighted the inherent market risk that exists in the balance sheet of Indian banks, rates are likely to rise gradually, rather than in sudden violent surges.

This may affect the banks' profits as stated earlier, but their capital base should largely stay intact.

In fact, higher earnings from the bank's lending activities, together with the regulatory forbearance that the RBI has displayed, by allowing banks to shift a portion of their SLR securities to the Held to Maturity category, may even substantially absorb or offset such marked to market (MTM) losses.

As a result of the rise in the rupee interest rates, the MTM provisions on the banks' Government securities portfolio have substantially eroded the unrealised gains.

With the possibility of interest rates rising further in the future, Fitch has cautioned, that the unrealised gains may turn into losses.

The incidence of market risk has again brought attention to the relatively low level of capitalisation of most Indian banks.

In view of the increased regulatory capital allocation for market risk in future, Indian banks' capital base would appear even less satisfactory, although most banks are exploring various options to boost their capital position, Fitch has said.

The focus on market risk has also drawn attention to the quality of earnings of Indian banks, even as they seek to replace their depleted trading profits with lending-related and non-interest income.

This is likely to emerge as an important tool for differentiating between banks in an increasingly competitive environment.

Banks will also need to more actively manage their investment portfolio through better risk measurement and monitoring systems.

At some stage of the cycle, the rising interest rates should reflect in higher net interest margins.

Until then, profits of most Indian banks will likely be under pressure, according to Fitch.

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Rising rates may dent banks' profits, not capital base: Fitch