scorecardresearchBanking sector at its best in decades, says India Ratings; raises FY23 credit growth estimate to 13%

Banking sector at its best in decades, says India Ratings; raises FY23 credit growth estimate to 13%

Updated: 23 Sep 2022, 08:30 AM IST
TL;DR.
The key financial metrics are likely to continue to improve in the rest of FY23, backed by strengthened balance sheets and an improving credit demand outlook, especially for working capital, noted India Ratings.
The key financial metrics are likely to continue to improve in the rest of FY23, backed by strengthened balance sheets and an improving credit demand outlook, especially for working capital, noted India Ratings.

The key financial metrics are likely to continue to improve in the rest of FY23, backed by strengthened balance sheets and an improving credit demand outlook, especially for working capital, noted India Ratings.

India Ratings and Research (Ind-Ra) has maintained a stable outlook on the overall banking sector and expects it to improve for the rest of FY23. As per the rating agency, the banking system’s health continues to be at its best in decades. The key financial metrics are likely to continue to improve in the rest of FY23, backed by strengthened balance sheets and an improving credit demand outlook, especially for working capital, it noted.

This can also be seen in the share price performance of banks. On a YTD basis, the Nifty Bank index has jumped 15 percent versus a 1 percent rise in the benchmark Nifty. Meanwhile, in the last 1 year as well it is up over 10 percent.

Also, all constituents of the Nifty Bank index have also given positive returns in 2022 YTD with Bank of Baroda surging the most, up nearly 70 percent followed by Federal Bank, up 48 percent and IndusInd Bank, up 37 percent. Meanwhile, AU Small Finance Bank, SBI, ICICI Bank, Axis Bank and Bandhan Bank also gave double-digit returns in this period.

Ind-Ra also revised the credit growth estimate for FY23 to 13 percent from 10 percent due to factors like an uptick in working capital demand. The pressure on hiking interest rates on deposits is likely to intensify, however, the decline in credit could offset an increase in deposit costs, highlighted the rating agency.

Ind-Ra said that a stable rating outlook for banks for FY23 indicates their waning legacy asset quality issues, strengthened balance sheets, manageable covid-19 impact and expectations of improved profitability across the banking sector.

"Within the banking universe, private sector banks are likely to continue to gain market share, though the pace of gains is likely to moderate as public sector banks (PSBs) expand the loan portfolio faster, supported by strong balance sheets and supportive credit demand in the system. The agency expects credit costs of PSBs and private sector banks to converge and trend lower; this could offset the likely increase in deposit costs for the banks. However, private sector banks are likely to gather pace on deposit accretion, supported by the offering of better yields as competition for deposits intensifies," forecasts the agency.

The factors driving the upward revisions in credit growth include the following: i) the rise in working capital demand even as capex is likely to see some moderation, given the build-up of macro uncertainties; ii) with the adverse interest rate cycle, there is a visible shift from capital markets to the banking system for longer-term funding; iii) the revival in credit demand from the corporate segment is better than expected, especially in sectors such as infrastructure and chemicals, explained Ind-Ra.

It further pointed out that asset quality metrics also continue to improve, with the gross non-performing assets (GNPA) ratio for the banking system declining to 6.1 percent in FY22 from the peak of 11.2 percent in FY18. It is likely to increase to 6.8 percent in FY23, predicted India Ratings.

The agency expects the provisioning cost for FY23 to be about 1 percent against 1.4 percent in FY22. The net interest margins are also likely to see tailwinds as interest rates continue their upward trajectory, as loans tend to be repriced faster than deposits in an upward rising interest rate environment, it added.

Ind-Ra further opined that in the current upward trending interest rate cycle, banks are likely to continue to face headwinds on their mark-to-market (MTM) gains from their investment portfolio. However, with limited upside pressure on long-term interest rates, further material impact on MTM in the near term is unlikely in FY23, it cautioned.

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First Published: 23 Sep 2022, 08:30 AM IST