India Ratings maintains 'stable' outlook on Indian banks

Banks will largely remain resilient to the cyclical downturn on improvement in loan loss reserves and common equity injections

India Ratings & Research said on Thursday that banks in the country would largely remain resilient to the cyclical downturn, on improvement in loan loss reserves and common equity injections in 2014.

These factors will help banks maintain adequate defenses. They underline a stable outlook for the sector in 2014. However banks continue to face credit quality pressures from loan concentration, borrowers’ over-leverage and the prevailing economic slowdown.

The portfolio of stressed assets — gross non-performing assets plus standard restructured assets — is expected to grow from about 10.25 per cent at the end of September 2013 to 14 per cent by March 2015.

In a base case scenario, the return on assets of public sector banks will continue to trend 15-20 basis points lower than the long-term average of 0.9 per cent. But it will still be adequate to absorb rising credit costs without impacting capital for most banks, the rating agency said.

Corporate borrowers, however, have limited resilience to further shrinkage in profit margins. A pick-up in real economic growth might improve cash flows from mid-2014. But, any failure in this revival and further increase in interest rates might result in a wave of failed restructuring.

It might test the profits of a broader base of government banks and some of the weak private banks. Regulatory measures are forcing banks to improve loan loss reserves on restructured loans and exposure to companies with large unhedged foreign exchange liabilities. These are expected to boost the total loan loss reserves (specific and general) of the system to nearly 70 per cent of gross NPAs on a sustained basis from the current level of 63 per cent. This will also improve the cyclical resilience of banks.

But it will still be adequate to absorb rising credit costs without impacting capital for most banks, rating agency said.

The corporate borrowers however have limited resilience to further shrinkage in profit margins. A pick-up in real economic growth may improve cash flows from mid-2014. But, any failure in this revival and further increase in interest rates may result in a wave of failed restructuring.

It may test the profits of a broader base of government banks and some of the weak private banks. Regulatory measures are forcing banks improve loan loss reserves on restructured loans and exposures to companies with large unhedged foreign exchange liabilities.

These are expected to boost the total loan loss reserves (specific and general) of the banking system to nearly 70 per cent of gross NPAs on a sustained basis from the current level of 63 per cent. This will also improve the cyclical resilience of banks.