Global rating agency Fitch says the continued improvement in the financial performance of Indian banks augurs well for the internal risk profile of the sector.
According to the rating agency, the pace of improvement in asset quality and profitability has been more than expected. However, capital buffers are broadly in line with estimates.
Fitch said the bad-loan ratio of Indian banks declined to 4.5 per cent in the first nine months of the fiscal year ending fiscal 2023 (9MFY23), from 6 per cent in FY22. This was around 60 basis points lower than Fitch’s FY23 estimate.
Citing increased write-offs as a key factor, Fitch said in its statement that higher loan growth, supported by lower slippages and better recoveries, also played a role.
The rating agency expects further improvement by FY23, though banks will face the risk of asset-quality pressure linked to loan waivers in FY24.
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“The sector’s reform provision cover (9MFY23: 75 per cent, FY22: 71 per cent) also supports the risk appetite of banks, although private banks have a lower impaired loan ratio of 2.1 per cent as compared to state banks.” are much better, as against 5.6 per cent of state banks,” it said.
Fitch further states that the sound economic momentum has contributed to a decline in credit cost to 0.95 per cent in 9MFY23, as compared to 1.26 per cent in FY2012.
“Lower credit costs were the primary factor driving return on assets to 1.1 per cent in 9MFY23, beating Fitch’s FY23 estimate of 0.9 per cent, though higher-than-expected loan growth in earnings and net interest margin Reforms also benefited,” it said.
Furthermore, the rating agency says that banks have reasonable tolerance to absorb the pressure of credit cost and margin normalization without impacting FY24 profitability forecasts.
The pre-loss operating profit in private banks at 4.5 per cent on loans provides more headroom as compared to 3 per cent in state banks and supports private banks’ return on assets of 1.9 per cent, which has so far been 0.7 per cent for state banks. is greater than the percentage. This couple.
According to Fitch, continued high loan growth, coupled with rising risk density, could put pressure on capital. The common equity tier 1 (CET1) ratio of the sector increased by about 54 basis points to 13.3 per cent in 9MFY23, while the net impaired debt/equity ratio declined by 460 basis points to 9.6 per cent.
“The bank’s performance has further improved and… may be sustained for longer than we initially expected, mainly in the backdrop of risks related to the COVID-19 pandemic and the steady improvement in the bank balance sheet over the past three years With, in part due to tolerances,” it said.
Continued reduction in financial sector risks may support a higher operating environment score, but this will depend on our assessment of various factors, such as medium-term growth potential, borrower health and lending under regulatory relief, near-term bank only Instead of showing, it said.
There is also a risk that continued strong credit growth could lead to a selective or incremental increase in risk appetite, while net interest margin compression and higher credit costs could weigh on the financial profile even after regulatory forbearance is phased out. Said.
In citing the rating upgrade, Fitch pondered whether the improvements in the financial profile are sustainable and outweigh any additional risks.
With PTI inputs.
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