What ails India’s banks: Moody’s, S&P Global flag risks around Asian lenders

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July 29, 2020 1:20 PM

The coronavirus pandemic is going to hit financial institutions hard; and it is a reality which has not escaped even the least concerned.

Banks are required to raise capital at the moment.Moody’s said that lenders in Asia Pacific primarily have relied on net-interest income (NII) for profitability, accounting for about 70% of the total revenue on average since 2008.

The coronavirus pandemic is going to hit financial institutions hard; and it is a reality which has not escaped even the least concerned. In Asia-pacific countries the disruptions caused by coronavirus have outlined structural challenges in such a manner that profitability will deteriorate in the coming years along with asset quality deterioration. Two of the premier rating agencies globally — Moody’s and S&P Global — have in just as many days raised red flags on how the financial institutions might suffer in resurfacing after being bullied down by the waves of the pandemic. For India the challenges could be tougher than other Asian peers.

Moody’s said that lenders in Asia Pacific primarily have relied on net-interest income (NII) for profitability, accounting for about 70% of the total revenue on average since 2008. Looking at Indian lenders NII as a percentage of total assets has been among the lowest in India. The largest pie of total assets of Indian banks is taken by loan loss provisions, Moody’s data showed. “India is seeing a very sharp economic contraction and had high nonperforming loans leading into COVID-19,” S&P Global said while adding that the path to recovery for India and Indonesia, from the pandemic may be more painful than for some other Asia-Pacific banking jurisdictions.

Funding for banks in India is driven by time deposits, primarily followed by current and saving account deposits. “Rates for CASA deposits are already low, and with the lower bound being effectively zero as APAC banks have not been willing to go into negative deposit rates, they tend to be relatively insensitive to changes in overall interest rates in an economy,” Moody’s noted. With the fall in interest rates, current and saving account deposit rates decline much less than lending rate, according to Moody’s. This hurts the net-interest margins of banks. Additionally, banks have also turned risk averse moderating loan-growth which could lead to even lesser net interest income.

S&P Global expects the banking sector’s weak assets to shoot up to 13%-14% of gross loans by the end of this fiscal from an estimated 8.5% as of March 31, 2020. To add to the woes of the lenders are the non-bank lenders that account for 8.8% of the banking system’s loans. “We expect that the current economic downturn will hit a small part of the NBFC sector harder than the banking sector, given some of the NBFCs lend to weaker customers,” S&P Global said. On the credit cost front, both Moody’s and S&P Global expect a surge. While State Bank of India, HDFC Bank, ICICI Bank are rated BBB-/Negative by S&P Global, Axis Bank and Bank of India have a BB+/Stable outlook.

Another challenge that will hit already struggling lenders is the effort to change business models to diversify income streams. Moody’s said that banks might try and step up efforts to fundamentally improve profitability by reducing their dependence on NII from domestic markets. This might include generating income from credit cards or transactional banking and wealth management. “In the long term, laggard banks that fail to change their business models will become acquisition targets or will have to merge to survive.” the rating agency said.

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