Fitch Says Indian Banks On A Strong Growth Trajectory, Risks Receding
Capital ratio, earnings buffer, operating profit for Indian banks have improved significantly, says the rating agency.
The operating environment for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have ebbed, according to Fitch Ratings.
"A number of prudential indicators for the sector have also improved compared with pre-pandemic levels, though growing risk appetite in a relatively benign operating environment highlights the importance of appropriate buffers against potential stress," Fitch said.
Fitch had revised its 'operating environment' mid-point score for Indian banks to ‘bb’ from ‘bb+’ in March 2020, after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector. India was badly affected by the pandemic, but the associated risks have now receded.
Fitch affirmed the sovereign’s rating at ‘BBB-' with a 'stable’ outlook in May and currently forecasts real GDP growth to average 6.4% annually in the three years to March 2026 (FY23-FY25).
"Overall business and economic activity has picked up quite significantly. Even on the consumer and business sentiment, they continue to be on the upswing," said Saswata Guha, senior director of financial institutions at Fitch Ratings, told BQ Prime in an interview. "What is important to note is that this is happening while inflation and the interest rates are going up."
The easing of pandemic-related risks has been accompanied by a strengthening of capital buffers, reflecting in a rise in the sector's average common equity Tier 1 (CET1) capital ratio. "Earnings buffers also appear significant, with operating profits equivalent to around 2.8% of risk-weighted assets by our estimate in FY23, up from 0.6% in FY20," the ratings agency said.
Fitch expects some normalisation in bank credit growth in FY24. However, rapid loan growth and higher exposure to certain asset classes is also likely to indicate greater risk appetite, amid stiff competition, which could raise sectoral risk if not managed carefully.
"India’s private credit/GDP, at around 57% in 2022, is already moderately higher than the median for sovereigns in the ‘BBB’ category, of 50%," the ratings agency said in its statement.
In terms of potential risk, Fitch Ratings said that the excessive legal delays were an impediment in the implementation of a strong bankruptcy framework. Specialised entities like the bad bank, which was established in 2021, have not achieved what they set out to do, it said.
According to Guha, while the operating environment and financials for banks has strengthened, the risk profile for the lenders remains the same.
"Irrespective of the improvement in the financials, it does not necessarily signify an improvement in the risk profile (of banks). The risk that has been underwritten in recent years has not really been put to the test," Guha said.
Earlier in May, S&P Ratings had also said that it expects the banking sector profitability to stabilise at a healthy level and that banks' asset quality will continue to improve.
Indian banks' earnings will likely remain healthy, according to the ratings agency.
"The formation of new non-performing loans will remain at cyclical low levels, despite pressure from higher interest rates," S&P Global Ratings' Credit Analyst Geeta Chugh had said. "A recovery in written-off accounts is also boosting the profitability of banks," she had said in May.
Watch the full interview here:
