PSBs’ earnings turnaround to sustain this fiscal on pick up in loan growth, lower credit costs: S&P Global Ratings

S&P Global Ratings, sees credit growth in the Indian banking system hover at robust 11-12 per cent in the current fiscal as well as next year. 

The ongoing pick up in loan growth in banking system and lower credit costs would help the public sector banks sustain the turnaround in earnings during the current fiscal as well, Geeta Chugh, Senior Director & Sector Lead, India and SSEA, Financial Institutions, S&P Global Ratings, told BusinessLine.

The improving profitability is expected to lead to capital formation and it is going to be almost after eight years when banks’ Return on Assets (RoAs) will normalise to 1 per cent, she added.

It maybe recalled that public sector banks had in aggregate recorded net profits in both 2020-21 and 2021-22. These banks had recorded collective losses for five straight years  from 2015-16 to 2019-20.

Chugh said that she expects most banks will continue to perform better on earnings front than last year as they have cleaned up their balance sheet in a significant fashion.

“That drain on the earnings in the last few years was firstly on account of delayed recognition of NPAs and secondly, slower buildup of provisioning coverage. As most of the banks have done large part of that already, we think that the earnings momentum for public sector banks should also maintain,” she said.

“Having said that we see already clear divergence between the earnings of let’s say private sector banks and SBI versus the other public sector banks, where there is a strong polarization that’s happening. SBI and the leading private sector banks have largely addressed their asset quality challenges, whereas other public sector banks are still saddled with large amounts of weak assets, which would continue to drive higher credit losses, though we expect them to be profitable.”

Stating that there has been a significant improvement in the asset quality of the Indian banking sector, Chugh said that the non-performing loans level is expected to further decline to about 5-5.5 per cent of gross loans by end March 2024. 

Credit costs

S&P Ratings also expects the credit costs to stabilise at 1.5 per cent for the current fiscal and further normalise to 1.3 per cent. Indian corporates have been deleveraging their balance sheets and performing well during the Covid-19 period, she added.

“So all in all, banking sector does look positive, though, we feel that there are a few risks on the horizon”, Chugh told BusinessLine in an interview.

The main macro headwinds that pose risk include the lingering effects of Covid which are still around for most APAC markets —lesser so far in India, but generally that’s one risk factor. 

The other risk factor is high inflation and rising interest rate environment, which  has a potential to dampen credit demand, push some low income consumers to the edge of default.

“It could also pressurise SMEs which are still reeling from the impact of the pandemic, though in our current expectation is that a moderate increase in interest rates should not impact that segment as much,” Chugh said.

She highlighted that banks have largely provided for the legacy NPAs and the recovery momentum should help them as the loan provision coverage ratio is in excess of 70 per cent today. This coverage should largely take care of the existing stock of NPLs on their balance sheet, Chugh added.

Chugh’s optimism over further improvement in banks’ asset quality comes at a time when the latest RBI Financial Stability Report showed that gross non- performing assets (GNPA) of scheduled commercial banks declined to 5.9 per cent in March 2022 from 7.4 per cent in March 2021.

Chugh also highlighted that besides making adequate provisions, banks had raised capital to cushion their balance sheets. 

On economy

S&P Global Ratings expects the Indian economy to expand at 6.5-7 per cent per annum over the next three to four years.

Chugh also said that bank credit growth is expected to be led by retail, which continues to be very promising sector for bank lending.

“The segment within retail where we are more worried about is the low income households, these are more vulnerable to rising interest rates and high inflation. And this is also the segment which was the worst impacted during the pandemic,” she said.

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