Even though banks are expected to incur mark-to-market (MTM) losses of ₹10,000 crore to ₹13,000 crore in Q1FY23, their profitability is likely to remain steady driven by improved loan growth and core operating profits, per ICRA’s assessment.
The credit rating agency expects public (PSBs) and private sector banks (PvSBs) to suffer MTM losses of ₹8,000 crore to ₹10,000 crore and ₹2,400 crore to ₹3,000 crore, respectively, on bond portfolios in Q1FY23.
Anil Gupta, Vice President, ICRA, said, “Despite these expected MTM losses, we expect the net profits of the banks to remain steady, given the expected growth of 11-12 per cent in their core operating profits in FY23, which will more than offset the MTM losses.
“However, if the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY23.”
ICRA noted, contrary to trends of negative incremental credit during Q1FY23, the incremental credit growth for banks remained significantly positive and was supported by credit growth across all segments.
Funding: Large corporates shift to banks
With rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in Q1FY23.
“To meet the funding requirements, large borrowers have shifted from debt capital market to banks, which are aiding the improvement in the credit offtake,” ICRA said.
The agency observed, while rising interest rates may moderate credit demand in the coming quarters, incremental bank credit offtake of ₹12-13 lakh crore (+10.1-11.0 per cent year-on-year/YoY), well above the incremental bank credit offtake of ₹10.5 lakh crore (+9.7% YoY) in FY22.
Faster rate hike transmission
With 43 per cent of the floating rate loans of banks linked to external benchmarks (77 per cent of loans are floating for banks) and the higher increase in the external benchmark compared to the marginal cost of fund-based lending rate (MCLR), the rate transmission is expected to be faster for banks in this cycle, the agency said.
This, coupled with the lag in the upward repricing of deposits and improved credit growth, will aid the improvement in the operating profits of banks.
Overall, with stable net profits, but an increase in the asset base, there could be a moderation in the reported return on assets (RoA).
ICRA expects RoA of 0.50-0.55 per cent for public banks in FY23 compared to 0.55 per cent in FY22 and 1.24-1.33 per cent for private banks in FY23 compared to 1.42 per cent in FY22.
In line with the agency’s expectation, gross slippages stood higher at ₹3.1 lakh crore (or 3.1 per cent of standard advances) in FY22 compared to ₹2.6 lakh crore (2.7 per cent) in FY21.
However, the slippage rate in H2FY22 was lower at 2.4 per cent compared to 3.7 per cent in H1FY22 because of the second wave of Covid-19.
“While we remain watchful of the weakening macro-economic parameters and the performance of restructured loans, we expect that slippages could continue to be moderate and remain at 2.5-2.7 per cent of standard advances in FY23. This would be driven by the reducing bounce rates and overdue loans across most banks,” ICRA said.
The headline asset quality numbers continue to improve for banks with gross non-performing advances (GNPAs) of 6 per cent (lowest in last six years, since December 31, 2015) and net NPAs of 1.7 per cent (lowest in last nine years, since March 31, 2013).
With a lower slippage rate and better credit growth, ICRA expects the GNPAs to decline further to 5.2-5.3 per cent by March 31, 2023.
The net NPAs may, however, remain range-bound at 1.6-1.8 per cent as the recoveries and upgrades could moderate in the current year in the absence of restructuring.
“Notwithstanding the improving headline asset quality numbers, the stressed assets (net NPAs and standard restructured loans) stood at 3.8 per cent of standard advances as on March 31, 2022, higher than the pre-Covid level of 3.1 per cent.”
“The performance of the restructured loans has not been very encouraging as around ₹25,000 crore or 14 per cent of the Covid restructured loans of ₹1.85 lakh crore slipped in H2FY22 and around ₹14,500 crore or 8 per cent was repaid by borrowers,” Gupta said.
The agency opined the capital profile of banks remains steady with a sequential improvement in the capital ratios for public, as well as private banks.