FY23 Outlook: Banking Sector in best of health in decades- Ind-Ra

17 Feb 2022 , 12:46 PM

India Ratings and Research (Ind-Ra) has revised the outlook on the overall banking sector to improving for FY23 from stable, as the banking system’s health is at its best in decades. The improving health trend that began in FY20 is likely to continue into FY23. Furthermore, key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of corporate capex cycle.

While the tightening liquidity would  push up interest rates, impacting treasury gains, it would at least partially offset in the short term as loans get repriced faster than deposits; almost one-third of the systems loans are linked to external benchmark rates. Ind-Ra has marginally revised its credit growth estimates to 8.4% from 8.9% for FY22 and 10% for FY23.

The growth will be supported by a pick-up in economic activity post Q1FY22, higher government spending on infrastructure and a revival in retail demand. The agency estimates GNPA at 6.3% and stressed assets at 8.7% for FY22 and at 6.1% and 7.6%, respectively, for FY23. The agency expects provisioning cost for FY22 at about 1.5% and 1% in FY23.

Ind-Ra’s Stable Outlook on large Pvt Banks for FY23 indicates their continued market share gains in both assets and liabilities. Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large Pvt Banks are likely to witness continuing market share gains due to their superior product and service proposition.

Ind-Ra also has a Stable Outlook on most old Pvt Banks for FY23 which generally have a sticky liability franchise. However, they would need to invest in technology further to be in the play, else they may not be able to offset the pricing benefit that large banks may offer. Nevertheless, their asset quality challenges could be material, given their larger proportion of SME.

Ind-Ra’s Stable Outlook on PSBs for FY23 reflects reasonable capital buffers, low overhang of corporate stress in terms of expected slippages and manageable impact of COVID-19. Ind-Ra expects PSBs to look for growth across sectors and benefit from loan recoveries, considering their highest profitability in the past six years. In FY22, Ind-Ra has revised the Negative Outlook to Stable on Long-term Issuer Ratings on five government-owned banks.

Corporate Segment to Supplement Retail in Driving Credit Growth: Ind-Ra has estimated capex would rise to about Rs7.0 trillion each in FY22 and FY23 (FY21: Rs5.5 trillion), based on a demand ramp-up by end-FY22 and a further pick-up in FY23 with an economic recovery. Ind-Ra expects leverage to start building in FY23 on account of a revival in capex, increased working capital demand due to a higher output, higher exports and commodity inflation. Ind-Ra also estimates INR2 trillion of primary investments in focus sectors linked to the Performance-linked Incentive scheme (such as electronics, textiles, defence, pharma, chemicals and electric vehicles).

Most of this investment would be upfronted in FY22-FY23 so as to maximise the period for which the benefits could be availed by corporates. This could further boost secondary investments. Overall, the bank credit growth to the corporate segment could be around 8% yoy in FY23.

Segmental Asset Quality — Retail and MSME See Maximum COVID-19 Impact: Ind-Ra estimates that asset quality in the retail and micro, small and medium (MSME) segments are most impacted in the ongoing pandemic environment. The stressed asset ratio (GNPA + restructured) in the retail asset segment is expected to almost double to 5.7% at end-FY22 from 2.9% at end-FY21, whereas for the MSME segment, it could increase to 15.8% from 11.7%.

Additions expected from the agri segment would be in line with the trend over the past four years. Corporates segment’s stressed assets would slightly drop in FY22 to 10.4% from 10.8% in FY21 on account of recoveries from a couple of large accounts and ongoing recoveries and upgrades in other smaller corporate accounts. For FY23, the agency expects stressed assets in retail to decline to 4.9% on account of recoveries, to increase further to 16.7% for MSMEs on account of continuing stress in the segment and to decline to 10.3% for corporates on account of a continuing trend of recoveries.

The analysis here does not factor in write-offs from GNPAs; banks have written off 1%-1.5% of GNPAs annually over the past four years. The actual GNPAs at end-FY23 would be lower to the extent of write-offs.