PSBs’ earnings turnaround to sustain this fiscal on pick up in loan growth, lower credit costs: S&P Global Ratings

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S&P Global Ratings expects credit growth in the Indian banking system to hover at a solid 11-12 percent in the current fiscal year as well as next.

A continued pickup in loan growth in the banking system and lower credit costs should help public sector banks maintain turnaround in earnings during the current financial year as well, Geeta Chu, Senior Director and Sector Leader, India and SSEA, Financial Institutions, S&P Global Ratings, He said Business line.

She added that improved profitability is expected to drive capital formation and that it will be about eight years later when banks’ return on assets (RoAs) will return to 1 percent.

You may recall that, in total, public sector banks reported net profits in both 2020-2021 and 2021-2022. These banks posted collective losses for five consecutive years from 2015-16 to 2019-20.

Zhou said she expects most banks to continue to perform better on the earnings front than last year as they cleaned up their balance sheets in a significant way.

“This drain on earnings in the past few years has been firstly due to the delay in NPA recognition and secondly, the slower build-up of savings coverage. Since most banks have done a good chunk of that already, we think the earnings momentum of public sector banks should also be maintained.”

“Having said that we already see a clear divergence between the earnings of private sector banks, private sector banks and sub-executing banks versus other public sector banks, where strong polarization is happening. SBI and the leading private sector banks have largely dealt with the asset quality challenges, while the banks have The other public sector is still saddled with large amounts of weak assets, which should continue to increase credit losses, although we expect it to be profitable.

Pointing to a significant improvement in the asset quality of the Indian banking sector, Chugh said the level of non-performing loans is expected to drop to around 5-5.5 percent of total loans by the end of March 2024.

credit costs

S&P Ratings also expects credit costs to stabilize at 1.5 percent for the current fiscal year and to normalize to 1.3 percent. She added that Indian companies were reducing their balance sheets and doing well during the Covid-19 period.

“So overall, the banking sector looks positive, although we feel there are some risks on the horizon,” Chough said. Business line in an interview.

The main macro headwinds that pose a risk include the ongoing impacts of Covid that are still present in most of the Asia Pacific markets – except in India for now, but overall that’s a risk factor.

Another risk factor is high inflation and a rising interest rate environment, which has the potential to dampen demand for credit, and push some low-income consumers to the brink of default.

“It could also put pressure on small and medium-sized businesses that are still suffering from the impact of the pandemic, despite our current expectation that a moderate increase in interest rates should not affect this sector to the same extent,” Chough said.

She highlighted that the banks had largely saved the old NAPs and that the recovery momentum should help them as the loan provisioning coverage ratio is over 70 percent today. That coverage should largely concern itself with the current stock of non-performing loans on its balance sheet, Chough added.

Chugh’s optimism about further improvements in banks’ asset quality comes at a time when the Reserve Bank of India’s (RBI) latest financial stability report showed that total non-performing assets of scheduled commercial banks fell to 5.9 percent in March 2022 from 7.4 percent in March 2021.

Chough also emphasized that besides making adequate provisions, banks have raised capital to shore up their balance sheets.

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S&P Global Ratings expects the Indian economy to expand by 6.5-7 percent annually over the next three to four years.

Chough also said that bank credit growth is expected to be led by the retail sector, which remains a very promising sector for bank lending.

“The part of retail that we are most concerned about is lower-income households, who are more vulnerable to higher interest rates and higher inflation. This is also the part that has been hardest hit during the pandemic.”