Indian banks' profitability distinctively weaker than BRICS peers: Moody's

Recognition of stressed assets is largely complete and new non-performing loan formation will moderate in the next 12-18 months, said Moody's Investors Service

Moody's Investors Service on Monday said the profitability of Indian banks is "distinctively weak" compared to those in BRICS nations, but it will improve from next financial year as asset quality stabilises. 

On capitalisation, Moody's said it is the "weakest" for Indian banks with a tangible common equity ratio of 8.7 per cent at the end of 2017. 

"System-wide asset quality in India is weak due to stressed public sector banks, which dominate the sector. Government capital infusions will boost weak public sector banks' capital ratios," it said. 

"The system as a whole is unprofitable due to high credit costs at dominant state-owned (Indian) banks," Moody's said, adding the profitability is "distinctively weak" for Indian banks than others in the five-nation BRICS bloc.

By contrast, Brazilian and South African banks have the highest return on assets (ROA).
 

"Indian banks, despite having a similar level of pre-provisioning profitability to Chinese banks, have a negative ROA because of high credit costs at public sector banks, which dominate the system. Their profitability will remain under pressure for the rest of the current fiscal year, which ends in March 2019, as provisions for credit losses will remain large. Indian bank's profitability will improve from the next fiscal year as asset quality stabilizes," it said.

The Moody's report on banks in BRICS countries said Indian lenders had the second highest non-performing loan (NPL) at 2017-end, followed by banks in Brazil, South Africa and China. Russian banks had the highest ratio of 11.8 per cent.

Brazilian banks had an NPL ratio of 3.5 per cent at the end of 2017, compared with 2.9 per cent for South African banks and the lowest of 1.5 per cent for Chinese banks.
 

"Indian banks also had a double-digit (NPL) ratio at the end of 2017. However, the recognition of stressed assets is largely complete and new non-performing loan (NPL) formation will moderate in the next 12-18 months, helped by on-going deleveraging by corporates and stable macro-economic conditions. Furthermore, reported NPL ratios will gradually decline as a result of stressed asset resolution," Moody's said.