Gradual improvement in operating environment cited as reason for upgrade to ‘stable’ rating
Moody’s Investors Service on Monday upgraded its outlook for India’s banking system to ‘stable’ from ‘negative’, citing a gradual improvement in the operating environment for lenders.
“The stable outlook on India’s banking system over the next 12-18 months reflects our expectation that the banks’ gradually improving operating environment will result in a slower pace of additions to problem loans, leading to more stable impaired loan ratios,” said Srikanth Vadlamani, vice-president and senior credit officer, Moody’s.
Vadlamani added that deteriorating asset quality was the key driver of Moody’s negative outlook on India’s banking system since November 2011.
In a statement, the rating agency said that the stable outlook is based on Moody’s assessment of five drivers: Improving operating environment, stable asset risk and capital, stable funding and liquidity, stable profitability, stable efficiency and stable government support.
On the operating environment, Moody’s expects India to record a GDP growth of around 7.5% in 2015 and 2016.
“Growth has been supported by low inflation and the gradual implementation of structural reforms,” it added.
As for asset risk and capital, Moody’s said asset quality will stabilise, in particular, while the banks’ stock of non-performing loans may continue to rise, the pace of new impaired loan formation in FY16 will lower than the levels seen in the past four years.
“Capital levels, however, are low for public-sector banks. Such banks exhibit common equity tier-1 ratios of only 6-10%, and their coverage of non-performing loans with loan-loss reserves averages 55%,” Moody’s noted.
It added that although the government’s decision to inject Rs 70,000 crore into PSU banks over the next four years is credit positive, this amount is still short of the banks’ overall capital requirements.
“Net interest margins should be broadly stable; there will be mild negative pressure from declining interest rates, but at the same time, we expect overall portfolio yields to benefit from an increasing share of higher-yielding retail loans,” it said, adding that there will continue to be a significant gap in profitability between the PSU and private-sector banks, as the PSU banks have lower non-interest income and higher credit costs.