Fitch 2011 rating outlook stable for most banks in India
Fitch's Outlook on Long-term ratings for Indian banks remains Stable in 2011, after a negative bias in 2009 following the credit crisis.
January 31, 2011 / 23:12 IST
Fitch's Outlook on Long-term ratings for Indian banks remains Stable in 2011, after a negative bias in 2009 following the credit crisis. The Stable Outlook reflects easing asset quality concerns, together with an improving loan loss reserves position and expectations of further infusions of common equity by the government.
India's strong growth environment and improved corporate credit profiles are likely to ease asset quality concerns for a large part of banks' loan portfolios, although a few vulnerable sectors, including commercial real estate, may see rising delinquencies. The Reserve Bank of India's requirement to raise specific loan loss provisions to 70% on incremental NPLs should also strengthen the banks' historically low reserves position. This will be timely, given the challenges of managing asset quality through a rising interest rate regime, together with the impact of any sharp corrections in property or equity prices.With expected loan growth of 20%-22% remaining above the internal capital generation rate for banks (around 10%), banks will need to infuse common equity to maintain core Tier 1 ratio at 9% or higher. Most of the fresh infusion will likely be from the government, given its intension to raise its shareholding well above the current regulatory minimum of 51% in government banks during this growth period.Fitch expects profitability to exhibit neutral to negative trends. Narrowing NIM in a rising interest rate regime will likely moderate profit growth, balanced by a possible reduction in credit costs as NPL accretions begin to ease. Higher pension provisions could be a drag on government banks' profitability, although the quantum and the accounting treatment are yet to be announced.Strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions. While some of these are long-term in nature, the overall funding profile could deteriorate if short-term non-repo borrowings are used to boost balance sheet size.Banks with improved competitiveness and tested risk management systems may see upgrades in Individual Ratings and, in some cases, in National Long-Term Ratings. The foreign-currency ratings of the major banks are mostly in line with India's sovereign rating ('BBB-'). Though unlikely at present, above average loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the Outlook turning Negative for some banks. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
