Indian banking to be among the last to recover in Covid-19 crisis: S&P

The banking systems in emerging markets such as India, Mexico, and South Africa will be back to the pre-Covid-19 levels only after 2023, a recovery that will be slower than their peers’ in many other geographies, according to rating agency Standard and Poor’s (S&P).

Considered a “late-exiter”, the Indian banking sector had significant asset-quality issues even before the pandemic, while asset quality was showing an improvement in many other jurisdictions, it said in a report titled “Global Banking: Recovery Will Stretch To 2023 And Beyond” released on Thursday.

Emerging-market banks will likely see a sharp increase in credit losses in 2020, but there is potential for a gradual improvement in the following years if economic activity rebounds.

Given the banks’ relatively strong profitability, S&P sees some cushion to absorb the anticipated weak performance in the loan portfolio.

Recovery to pre-crisis levels could occur for the Chinese banking system by end-2022, while other emerging markets may recover in 2023 or later. The full effect of the asset quality deterioration on banks’ balance sheets is expected in 2021.

Recovery to long-term averages for key asset quality and profitability ratios will take years for banks in emerging markets such as India, it added.

The Covid-19 pandemic and the oil price shock of 2020 are taking a heavy toll on global banks. The agency has taken 335 negative rating actions globally since the outbreak. “We anticipate it will be difficult for the financial strength ratings on financial institutions to return to pre-crisis levels,” it said.

The rating agency does not expect the world’s largest banking systems, including more than half of G20’s, to recover to pre-Covid-19 levels until 2023, or beyond.

Recovery will vary across banking jurisdictions. “We anticipate a lag between when an economic recovery takes hold and when the credit strength of banks stabilises,” S&P added.

Even for the least affected — the likely early-exiter banking jurisdictions — stabilisation and recovery may take 18 months or more after a rebound.

In a separate release, India Ratings (Ind-Ra) said non-bank financial companies (NBFCs) will take a long time to return to normalcy and asset quality concerns will continue to hamstring the sector.

“Although the liquidity and funding environment have improved for better-rated entities after July, there would be asset quality issues impacting overall profitability (for the sector) in FY21 and beyond,” said Ind-Ra in its half-yearly outlook for the sector.

“Thus, NBFCs have increased their focus on collections and have tightened underwriting standards; portfolio growth would take a back seat,” it said, adding the book under moratorium has progressively declined for all segments, and collection efficiency has improved from April to August, but collection levels are far lower than pre-Covid levels.

The rating agency maintained a negative outlook for the NBFC and the housing finance company (HFC) sector.