Singapore, January 09, 2017 -- Moody's Investors Service and its Indian affiliate, ICRA Limited,
see subdued prospects for India's banks, with both identifying
asset deterioration as a key challenge over the medium term.
"Asset quality will remain a negative driver of the credit profiles
of most rated Indian banks and the stock of impaired loans. Non-performing
loans (NPLs) and standard restructured loans will still rise during the
horizon of our outlook," says Alka Anbarasu, a Moody's
Vice President and Senior Analyst.
According to Moody's, such pressure on asset quality largely
reflects the system's legacy problems, as relating to the strong
credit growth seen in 2009-2012, when the investment plans
of Indian corporates rose significantly.
Nevertheless, aside from these legacy issues, the underlying
asset trend for Indian banks will be stable because of a generally supportive
operating environment. While corporate balance sheets stay weak,
a further deterioration in key credit metrics such as debt/equity and
interest coverage ratios has been arrested.
"We expect the pace of deterioration in asset quality over the next
12-18 months should be lower than what was seen over the last five
years, and especially compared to FY2016, even as we consider
those remaining problem loans which have not been recognized as such in
several large accounts," says Anbarasu.
In this context, Moody's also considers the Reserve Bank of
India's (RBI) asset quality review (AQR) in 2015 as a particularly
important catalyst in pushing banks to recognize some large accounts as
being impaired. As a result, Moody's now estimates
that the "true" level of impaired loans for Indian banks to
be around 1-1.5 percentage points higher than the latest
reported numbers.
Given the magnitude of stressed assets in the system, Moody's
expects the banks to increase their focus on resolving some of the large
problem accounts.
"In this regard, we expect an increased pace of debt restructuring
under the various schemes offered by the RBI, including the scheme
for the sustainable structuring of stressed assets (S4A), strategic
debt restructuring (SDR) and the 5:25 scheme," says
Anbarasu. "Nevertheless, weak reserving levels and
continued pressure on profitability will limit the ability of the banks
to proactively resolve problem assets under these schemes."
From ICRA's viewpoint, a muted level of credit off-take
-- on the back of weak demand, increasing competition
and greater disintermediation -- will continue to exert
downward pressure on lending rates.
"Such a development will be partly offset by the fall in the cost
of funds, but stubbornly high operating expense levels and elevated
credit costs will continue to dent profitability matrices for the banks,"
says Karthik Srinivasan, an ICRA Senior Vice President.
"And while bank profitability is not expected to be as weak as the
levels seen in FY2016, the weakness in asset quality will continue
to drag on profitability indicators, with return on equity remaining
in the single digits for FY2017 and FY2018," says Srinivasan.
ICRA further notes that, as of September 30, 2016, while
all the public sector banks had met the minimum common equity tier 1 (CET
1) requirement of 6.75% applicable by March 2017,
six also reported Tier 1 capital of less than 8.25%,
the regulatory minimum. Furthermore, the overall capitalization
levels of most of the public sector banks remains moderate to weak,
given that they need to attain the regulatory minimum Tier 1 requirement
of 9.5% by March 2019.
The Indian government's current plan of infusing INR450 billion
during FY2017-FY2019 -- of which INR164.14
billion have been already infused in the current year -- is below
ICRA's estimates of capital requirements of INR1,500-1,800
billion until FY2017-FY2019.
According to ICRA, of this total of INR1,500-1,800
billion, the banks can raise around INR800-950 billion by
issuing AT1 instruments, with public sector banks having issued
AT1 aggregating to around INR200 billion in the current year.
ICRA believes that the continued level of investor appetite will remain
the key factor determining future AT1 issuances, as the risk of
servicing the coupon payments on these bonds has increased considerably,
especially for the weaker public sector banks. This is because
substantial losses in this sector in the last few quarters have significantly
depleted revenue reserves.
In this context, the government may need to materially increase
the quantum of capital infusions into the public sector banks, in
view of the fact that investor appetite for common equity remains subdued,
as evidenced by weak share price multiples.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Alka Anbarasu
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
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Singapore 48623
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Gene Fang
Associate Managing Director
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
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Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077