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There are few indications of a meaningful recovery in bank earnings in the short term, though stressed assets are likely to have peaked and non-performing asset accretion is easing, said a report by Fitch Ratings.
Credit profiles remain under pressure, although the overall pace of deterioration slowed through FY15. Growth was concentrated mainly in retail assets, and could be an area of future pressure, given the surge in pace of growth, the statement added.
System-wide loan growth at 9.7 per cent in the financial year to March 2015 (FY15) was the lowest over the past decade, and concentrated mainly in retail and farm credit. The loan growth was 15 per cent in FY14. In FY2015, risk-aversion and weak credit demand were accompanied by continued asset-quality deterioration and rising capital needs.
External capital Fitch said that weak internal capital gAAeneration, low equity market valuations and Basel III migration means ongoing high reliance by State-led banks for external capital, with resort to government and hybrid capital in the interim. The domestic market for hybrid capital lacks depth and liquidity, and so banks may have little choice but to seek funds overseas as pressure for capital builds with banks approaching the Basel III deadline of FY2019.
“Fitch expects the stressed assets (NPAs + performing restructured loans) ratio to have largely peaked, although pressures are unlikely to subside quickly in the near term. The ratio had risen to 11.1 per cent by FY2015 (FY2014: 10 per cent).
“The bulk of the pressure came through in 2HFY15, including a sharp spike in restructuring in 4QFY15 led by State-owned banks (FY2015: 13.5 per cent; FY2014: 11.7 per cent). The rush to restructure loans was expected as regulatory dispensation under restructuring was due to expire in March 2015,” Fitch noted.
New gross NPA growth slowed across many State-led banks, while private banks played catch-up. Both ICICI Bank (up 44 per cent) and Axis Bank (up 37 per cent) reported higher NPA growth in FY2015. Most State-led banks reported increase in NPA ratios, and remain significantly above the average at private banks. SBI was the only major State-led bank to witness a lower ratio.
Fitch expects India’s real GDP growth to improve gradually to 7.8 per cent in FY2016 and 8.1 per cent in FY2017. This should eventually help reverse the asset-quality cycle, but the recovery process will be slow.
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