Indian banks to issue bonds to maintain capital levels: CARE Ratings

"To support credit-off take, banks are expected to shore up their liability franchise by raising capital (AT1 bonds, other debt instruments such as infrastructure bonds) and deposits," it said

With credit off-take increasing, Indian banks are expected to issue bonds to maintain their capital levels and support their advances while cost of funds -- deposits and borrowings are likely to increase, said CARE Ratings.

"To support credit-off take, banks are expected to shore up their liability franchise by raising capital (AT1 bonds, other debt instruments such as infrastructure bonds) and deposits. The market has been facing lower liquidity and elevated inflation, hence borrowing costs for deposits and the cost of raising capital are expected to increase," the credit rating agency said in a report.

The banks are increasing their interest rates for deposits and plans for bonds issue. Further, profitability is also expected to support the capital base of the banks. Overall, the scheduled commercial banks (SCB) are expected to remain adequately capitalised in the near term.

All SCBs have maintained their Capital Adequacy Ratio (CAR) greater than the minimum required level for Q3FY23. The median CAR and Common Equity Tier 1 (CET-1) ratio of SCBs witnessed a rise in Q3FY23 over Q3FY22 and Q3FY21, the report notes.

According to CARE Ratings, the net profit of SCBs grew by 45 per cent year-on-year (y-o-y) to Rs 0.65 trillion in Q3FY23 driven by a higher pre-provisioning operating profit (PPOP) growth compared to a lower growth in provisions.

The net interest income growth and stability in non-interest income helped PPOP to grow by 28.5 per cent y-o-y to Rs 1.30 trillion in Q3Y23. Meanwhile, provisions rose by 9.1 per cent to Rs 0.38 trillion.

Public sector banks' net profit rose by 64.3 per cent y-o-y to Rs 0.29 trillion in Q3FY23, meanwhile private sector banks' grew by 32.2 per cent y-o-y to reach Rs 0.35 trillion in Q3FY23, the report added.

Return on Assets of SCBs improved by 28 bps y-o-y to 1.23 per cent. At present, banks are in a better position after navigating the Covid period and managing mounted NPAs.

Healthy credit growth, improvement in asset quality, and lower growth in provisions due to lower incremental slippages and reduction in restructuring books are expected to generate healthy net profit growth.