Indian Banks’ profitability will remain at healthy levels despite slight moderation due to declines in net interest margins (NIMs) according to global rating firm Moody’s.
Also, higher risk weights for exposures to non-banking financial companies (NBFCs) and unsecured retail loans will result in a slight moderation in banks’ capital ratios. But their capitalization will still remain strong, it said.
NIMs will decline marginally as banks reprice maturing deposits at higher rates to fully reflect previous increases in interest rates. A slowdown in growth in higher-yielding loans after the Reserve Bank of India (RBI) increased risk weights for riskier loans to NBFCs and unsecured retail loans will also contribute to falls in NIMs, the rating firm said.
“However, we expect the system-wide return on assets (ROA) to remain healthy, around 1.1%, in fiscal 2024-25,” Moody’s said.
The profitability of the banking sector has greatly improved in the past five years mainly due to decreases in loan-loss provisions amid improvements in asset quality. The ROA of the sector increased to 1.2% in fiscal 2022-23 from -0.2% in fiscal 2017-18.
“We expect banks’ non-performing loan (NPL) ratios to continue to fall as the operating environment improves,” it said. The system-wide NPL ratio fell to 3.2% at the end of September 2023 from a peak of 11.2% at the end of March 2018 due to recoveries and disposal of legacy problem loans.
Slip ratios – or the ratios of newly accredited non-performing assets to total standard assets over a period – will remain low, helped by India’s strong economic growth. The quality of corporate loans will remain healthy, supported by declining balance sheets and earnings growth.
However, rapid growth in unsecured retail loans poses risks as interest rates remain elevated and domestic leverage has increased, albeit from a low base. But banks have built up enough loan losses to cover NPLs.
The outlook for India’s banking system is positive, Moodys said, as it expects the operating environment for banks to improve as government capital spending and robust domestic demand support India’s strong economic growth, which will support credit growth.
We expect banks’ Common Equity Tier 1 ratios to decline by 50-80 basis points due to increases in risk weights for exposure to NBFCs and unsecured retail loans. However, banks’ capitalization will remain strong as their internal capital generation follows the pace of capital consumption. They will also be able to easily raise capital if needed, given India’s buoyant stock market, Moody’s said.
The government support for rated public sector banks will be high due to their close links. The level of government support for private sector banks will depend on the systemic importance of each bank.
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