Moody's assigns stable outlook to banks, says NPAs are slowing

Moody's has given a stable outlook for Indian banks as asset quality is not expected to worsen. The sector rating is likely to remain stable in the next 12-18 months, says Alka Anbarasu, VP-Financial Institutions at Moody’s Investors. “Asset quality is reaching a bottom of the cycle. There will be some deterioration, but the pace should be slower,” Anbarasu told CNBC-TV18. The asset quality and solvency (capital) issues of the banks are accounted for in Moody’s rating. The estimated actual impaired ration of banks now is 1-1.5 percent than reported numbers, believes Srikanth Vadlamani. Moody’s had put this ration at 2.5-3 percent earlier. The reduction is the ration can be attributed to asset quality review (AQR), which has helped in recognizing NPAs. Srikanth believes that if banks successfully address capital issues, it could be a positive trigger for re-rating. However, a further fall in asset quality could be the negative trigger. Below is the verbatim transcript of Srikanth Vadlamani and Alka Anbarasu's interview to Ritu Singh on CNBC-TV18.Q: Can you tell us about the rationale behind the stable and slightly more optimistic outlook?Anbarasu: Our stable outlook is typically in relation to where we see the banks ratings going and this stable outlook denotes that in general we expect the banks rating will broadly remain stable. That needs to be kept in context of what we are seeing in the banking system. So one on asset quality, which is the key area of challenge for the banks, we see that maybe the asset quality is reaching a bottom of the cycle, there will be some deterioration but the pay should be lower. The banks solvency position is also a challenge but we think that all these factors are largely incorporated into our ratings of the banks and hence we see that between the 15 banks that we rate in the system, the rating should broadly remain stable over the next 12-18 months.Q: She spoke about asset quality, after the AQR, how much of the problem do you think has been addressed and how much more is there to come that will impact the profitability of the banks at least in the near-term that you could tell us?Vadlamani: When we had put out the sector outlook last year, we had estimated that the actual NPA ratio or the impaired loans for the banking system is probably 2.5-3 percentage points higher than what banks were reporting at that time.Now we are saying that the actual level of impaired loans is probably 1-1.5 percentage points higher and the significant reduction in that has been on account of AQR. So we think AQR has been very material, they have recognized a significant amount of problems although not all.The key point is that before AQR came, the Reserve Bank of India (RBI) governor at that point had said that they expect banks to clean up their balance sheets by March 2017 probably with the benefit of hindsight, you should have taken that statement very seriously because actions since then have lent a lot of credibility to that. So we do think that by March 2017, a lot of the cleanup of the balance sheets will happen.Q: Right now, your outlook on the banking sector is stable, what will be the key factors that will trigger a re-rating for the banks?Vadlamani: On the positive side, it will be if the banks are able to successfully address the capital issue and the easiest way of doing that -- although while you may argue that it is the most difficult way -- is by demonstrating access to equity capital markets because if they are at a stage where they are able to convince investors to invest in their equity, that will solve their capital problems and that is clearly a big positive driver.On the negative side, clearly if we are wrong in underestimating the extent of asset quality problem. If we figure out, if we find out that the actual asset quality problem is much more than what we think it is, clearly that will put some further negative rating ratio for the banks.