Large credit cost to keep bank profits under pressure in FY16

India Ratings says outlook for banking sector said impaired asset formation likely to move closer to peak by FY16 premised on gradual economic revival

Despite prospects of gradual recovery in the next financial year (Fy16), the profitability of Indian banks, especially public sector banks, will continue to stay under pressure as burden to provide for bad loans stays high.

According to rating agency India Ratings, unit of Fitch, outlook for banking sector said impaired asset formation is likely to move closer to peak by FY16 premised on gradual economic revival.

However, the asset quality recovery and credit growth pick-up would be sluggish, leading to a very small uptick in profitability.

The provision coverage ratio (amounts set aside for bad loans) remains low at 46% for sector in 2013-14 9 (FY14). It was 49% in FY 13.

The slippage ratio (fresh NPA formation) appears to be plateauing and the pipeline of loans going for debt recast has declined recently. Yet, the baggage of incremental provisions for old bad loans will stay high.

The rating agency computes the impaired asset book by taking into account gross NPAs, standard restructured loans, and securities receipts issued after sale of NPAs plus bonds given to banks while finalizing package for power distribution companies.

For the banking system, the impaired asset book as% of loans will be 13% by March 2016. The level is expected to remain flat in FY15 ending March 2015. It was 9.1% in FY14.

India Rating said the profitability of banks is likely to witness another year of pressure as credit costs remain elevated, with higher write-offs accompanying high delinquency. However, there could be some benefit coming to bottom-line in FY15 from gains and write-back on treasury book.

For 2015-16 net interest margins could marginally increase on reversal in monetary policy stance, while the recoveries are likely to pick up in the second half.

Referring to challenges for PSBs, rating agency said Mid-sized state-owned banks, which add up to 19% of banking profits (for FY14), would be under pressure to consolidate growth and focus on profitability.