Moody’s upgrades Indian banking system’s outlook to stable from negative

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Moody’s Investor Services on October 19 revised the Indian banking system’s outlook to stable from negative. Moody’s sees the deterioration of asset quality has moderated and the improvement in the operating environment will support the asset quality of banks.

The decline in credit costs will result in improvement of asset quality and lead to better profitability as capital remains above pre-pandemic levels.

It expects India’s economy to continue recovery in the next 12-18 months with GDP growth at 9.3 percent for FY22.

Weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded, it said.

It also said the quality of corporate loans has improved indicating that banks have recognized and provisioned for all legacy problem loan. The quality of retail loan has deteriorated but to a limited degree because large-scale job losses have not occurred, it said.

The capital ratios have risen across banks as most have issued new shares.
Public sector banks' ability to raise equity capital from the market is particularly credit positive because it reduces their dependence on the government for capital, it said.

Moody’s said further increase in capital will be limited because banks will use most of retained earnings to support loan growth.

Banks’ return on assets will increase as credit costs declined and banks’ core profitability will be stable. If there’s a hike in interest rates, net interest margins will increase also lead to mark-to-market losses on banks’ large holdings of government securities, it said.

Moody’s expects funding and liquidity will be stable for banks as PSU banks enjoy the public trust with sovereign backing, and the private banks have stable credit profiles and strong deposit franchise.