Covid-19: Indian banking system to be among the last to recover, says S&P

Path to recovery will be more painful and banks' recovery to long-term averages for key asset quality and profitability ratios will take years, it added

Hit by economic slump due to Covid-19, the banking systems in emerging markets like India, Mexico, and South Africa will be slower to recover to 2019 levels and it will happen only beyond 2023, according to rating agency Standard and Poor’s (S&P).

The Indian banking sector is considered a late-exiter. Its recovery will be longer. But some ratios may return more quickly to levels as they were weak prior to the onset of Covid-19 (in contrast with many other jurisdictions).

There were significant asset-quality issues in India prior to the onset of Covid-19, while asset quality was on an improving trend in many other jurisdictions, rating agency said.

Rating agency today released report "Global Banking: Recovery Will Stretch To 2023 And Beyond."

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

Given the banks' relatively strong profitability, there seems to be 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. 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.

The path to recovery will be more painful for emerging markets such as India. The banks' recovery to long-term averages for key asset quality and profitability ratios will take years, it added.

Covid-19 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 began. “We anticipate it will be difficult for the financial strength ratings on financial institutions to return to pre-crisis levels”, it said.

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

Recovery will vary across banking jurisdictions. There is expectation of an economic rebound in 2021 following the release of a vaccine by about the middle of that year. “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 a full 18 months or more after an economic rebound.

There will be much uncertainty on the recovery pathway. Banking sector recovery will not just depend on the economic recovery. It would also be influenced by the nature and extent of the economic damage affecting firms and households prior to the onset of the economic recovery, and the extent to which this will hit banks, agency added.