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Moody’s Investors Service on Thursday said its outlook on the Indian banking system is “stable”, with the system’s ongoing progress in managing legacy asset issues offsetting the significant capital shortfalls some banks continue to face.
“The outlook on the system is also in line with the stable outlook for 10 of the 15 banks we rate in the system and reflects stable operating environment and improved prospects for asset quality, among other factors,” Srikanth Vadlamani, Moody's Vice-President and Senior Credit Officer, said.
Moody’s conclusions are contained in its just released ‘Banking System Outlook-India, Asset Quality at trough levels drives stable outlook’.
The outlook expresses Moody’s expectations of how bank creditworthiness will evolve in the system over the next 12-18 months.
The 15 banks rated by Moody’s in India together account for about 70 per cent of assets.
Vadlamani said Moody’s believes that the operating environment is as indicated — stable. “Our baseline scenario assumes GDP growth of 7.1 per cent in the fiscal year ending March 2018, the same pace as the prior year,” he said.
Capitalisation will continue to bifurcate public and private sector banks. According to Moody’s, the common equity tier 1 ratio of public sector banks remains far below those of their private sector peers. The gap is likely to persist due to the government’s reluctance to infuse more capital into public sector banks.
Profitability remains low, but is improving. Lending margins will be stable because a drop in funding costs following demonetisation will likely offset the pressure from re-pricing of loans to the marginal cost of lending rate.
Banks still face higher credit costs due to tighter provisioning requirements for stressed loans, but these charges will be lower in absolute terms. Smaller treasury gains, however, will weigh on profitability.
In addition, banks will continue to have strong funding and liquidity. Banks have seen a surge of low-cost deposits following demonetisation, which has lowered their funding costs.
All rated banks will be able to comfortably meet the liquidity coverage ratios, according to Moody’s.
Government support will remain strong for public sector banks, despite a reluctance to bolster bank capital, Moody’s said.
Of the 15 banks rated by Moody’s, four are private sector banks with an average baseline credit assessment (BCA) of ba1, while the other 11 are State-owned entities with weaker standalone fundamentals and BCAs of as low as caa1.
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