Banks' profitability likely to moderate in 2011-12: Fitch

Narrowing net interest margins (NIMs) in a rising interest rate regime are likely to moderate the profitability of Indian banks in 2011-12, according to a report by rating agency Fitch.

Fitch expects the overall asset quality of banks to improve, which will, in turn, help them reduce credit costs. But it said sectors like commercial real estate and some export-oriented segments could see rising delinquencies.

The report indicated loan growth of 20-22 per cent in the next financial year. It expects NIMs to remain a dominant part of banks’ operating income. On the whole, Fitch maintained a stable outlook on the long-term ratings of Indian banks for 2011-12.

“NPL (non-performing loan) ratios are likely to peak around March 2011 when most of the restructured loans are due for redemption, some of which could turn non-performing. The strong growth environment and improved credit profile are likely to ease the asset quality concerns of a large part of the loan portfolio, although a few vulnerable sectors, including commercial real estate and some export-oriented sectors, might see rising delinquencies,” the report said.

The infrastructure sector is likely to remain the fastest growing in terms of credit growth. However, occasional delays and cost overruns, associated mostly with road projects, might require some additional restructuring of the portfolio, the report said.

In the event of a tighter monetary regime, the rating agency expects a slight deterioration in the funding profile of banks, as they become more dependent on wholesale corporate deposits to support loan growth.

Similarly, banks might require to infuse additional equity capital to maintain their Tier-I capital adequacy ratio at nine per cent, as the loan growth is likely to outpace internal capital generation.

“Most of the fresh infusion is likely to come from the government, given its commitment to help government banks maintain a minimum Tier-I ratio of eight per cent,” it said.