Economic recovery, regulatory measures ease pressure on Indian Banks: Fitch Ratings

14 Mar 2022 , 11:02 AM

India’s economic recovery and regulatory forbearance are supporting domestic banks in the near term, says Fitch Ratings. These factors, coupled with banks’ improving financial performance, are reflected in our stable outlook on the operating environment, which we revised from negative in November 2021.

Indian banks have benefitted from regulatory-sanctioned deferred recognition of Covid-19 pandemic-driven stress, which has led to a decline in impaired loan ratios and an earnings recovery that is being driven by lower loan impairment charges. We expect moderate pressure to re-emerge as forbearance starts to unwind from 2023, but the better near-term performance should create headroom for banks to absorb stress while maintaining their current financial metrics, Fitch says in the report.

State banks’ financial performance has improved significantly from historical lows, but private banks are better placed due to superior capital buffers, better underwriting and a more diversified and profitable business mix. We expect large private banks to continue the decade-old trend of gaining market share from state banks, whose growth is restrained by moderate capital buffers, Fitch added.

Pressure on state banks’ capitalisation has eased amid improving internal accruals, fresh capital injections and receding asset-quality risks, albeit their average common equity Tier 1 ratio was about 525bp lower than that of private banks for the nine months to the financial year ending March 2022. Stable funding is a credit strength for the sector, particularly for state banks, which benefit from high depositor confidence due to their state linkages.

Indian banks’ support-driven Issuer Default Ratings reflect the high-to-moderate probability of extraordinary state support for systemically important state and private banks, while the Negative Outlook on the ratings mirrors that on the sovereign rating (BBB-/Negative).