India Ratings upgrades outlook on banking sector to 'improving' for FY23

Key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets, an improving credit demand outlook and expected commencement of corporate capex cycle.

India Ratings and Research (Ind-Ra) has revised the outlook on the Indian banking sector from "stable" to "improving" for FY23 as its health is at its best in decades. The improving health trend that began in FY20 is likely to continue into the next financial year ( FY23).

Furthermore, key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets, an improving credit demand outlook and expected commencement of the corporate capex cycle.

While the tightening liquidity would push up interest rates, impacting treasury gains, it would be partially offset in the short term as loans get repriced faster than deposits. Almost one-third of the system's loans are linked to external benchmark rates.

Ind-Ra has marginally revised its credit growth estimates to 8.4 per cent from 8.9 per cent for FY22 and 10 per cent for FY23. The growth will be supported by a pick-up in economic activity post Q1FY22, higher government spending on infrastructure and a revival in retail demand.

The agency estimated that stressed assets would be 8.7 per cent for FY22 and are expected to moderate to 7.6 per cent for FY23. The agency expects provisioning cost for FY22 at about 1.5 per cent and one per cent in FY23.

The rating agency has a "stable" outlook on large private banks for FY23 indicating their continued market share gains in both assets and liabilities. Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks are likely to see market share gains due to their superior product and service proposition.

It also has a "stable" outlook on Public Sector Banks ( PSBs) for FY23 indicating reasonable capital buffers, low overhang of corporate stress in terms of expected slippages and manageable impact of COVID-19. Ind-Ra expects PSBs to look for growth across sectors and benefit from loan recoveries, considering their highest profitability in the past six years.

In FY22, the rating agency revised the negative outlook to "stable" on long-term Issuer ratings on 5 government-owned banks.