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, Karan Gupta, Director, Ind-Ra, said in a report.
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, as per Ind-Ra’s assessment. 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 per cent from 8.9 per cent for FY22 and 10 per cent for FY23. The growth will be supported by a pick-up in economic activity post Q1 FY22, higher government spending on infrastructure and a revival in retail demand.
The credit agency estimates gross non-performing assets (GNPAs) at 6.3 per cent and stressed assets at 8.7 per cent for FY22 and at 6.1 per cent and 7.6 per cent, respectively, for FY23. It expects provisioning cost for FY22 at about 1.5 per cent and 1 per cent in FY23.
PSBs: Stable outlook
Ind-Ra said its stable outlook on public sector banks (PSBs) for FY23 reflects reasonable capital buffers, low overhang of corporate stress in terms of expected slippages and manageable impact of Covid-19.
The agency 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.
Large PVBs: Market share gains
The agency said its stable outlook on large private sector banks (PVBs) 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 private sector banks are likely to witness continuing market share gains due to their superior product and service proposition,” as per the report.
Old PVBs: Asset quality challenges
Ind-Ra also has a stable outlook on most old PVBs 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 small and medium enterprises.