Moody's lowers credit outlook for banking system
Move indicates quality of assets could become weak.
Our Bureau
Mumbai, Jan. 30 Moody's Investors Service has downgraded the fundamental credit
outlook for the Indian banking system over the next 12 to 18 months to negative
from stable.
The change in credit outlook reflects the deceleration of the Indian economy in
the context of the global financial turmoil and an increasingly bleak economic
outlook, which, combined with higher loan delinquency rates, indicates a
potential weakening in the asset quality of Indian banks.
The negative credit outlook for the Indian banking system expresses the rating
agency's view on the likely direction of fundamental credit conditions in the
banking system.
The global credit rating agency expects loan growth to slow. It has projected
an annual credit increase of around 18 to 20 per cent, if India is to sustain a
GDP growth rate of at least 5 per cent.
Inevitably, the agency pointed out, the slower credit growth will hurt Indian
banks' revenues and operating profits as the proportion of incremental loans
declines, together with related fee and interest income.
Protecting earnings
"We also expect banks to follow less aggressive provisioning policies in order
to protect their earnings, which are expected to receive a boost from treasury
profits stemming mainly from fixed Government bond gains on the bank of lower
interest rates," Moody's said in its report entitled 'Stress Testing Indian
Banks' Asset Quality'.
The agency said the slowdown in economic activity is having some repercussions
for the asset quality of Indian banks on the back of increasing non-performing
loans (NPLs), especially in sectors such as real estate, unsecured personal
loans, including credit cards and small and medium enterprises, with
export-oriented units being most vulnerable.
Export missile
A slowdown in exports has been witnessed in recent months and this is likely to
affect companies operating in, among other sectors, textiles and gems &
jewellery, which account for close to 6 per cent of total loans in the banking
system.
"The global deleveraging process has caused a large capital outflow from India
since October 2008 and, as a result, there has been a tightening in the
provision of credit to the real economy from banks and higher capital costs for
corporates. Moreover, a reversal of the favourable credit cycle in India that
has underpinned the robust loan growth of the past few years has gradually been
taking place, combined with weakening business and corporate earnings," said Mr
Nondas Nicolaides, a Moody's Vice-President/Senior Analyst in Financial
Institutions Group.
Following the downgrade in the credit outlook, the ratings of certain public
sector banks with Bank Financial Strength Rating (BFSR) in the D+ range (Punjab
National Bank, Canara Bank, Bank of Baroda, Bank of India, Union Bank of India,
Syndicate Bank, and Oriental Bank of Commerce) could be placed under negative
outlook, the agency said.
"The negative outlook would recognise the credit challenges that these banks
(with a BFSR in the D+ range) will face, mainly stemming from probable asset
quality deterioration and the fact that they are less capitalised and in effect
less able to absorb shocks without capital replenishment," it said.
NPL forecast
A base-case scenario for the whole banking system suggests that the ratio of
gross NPLs as of March 2009 and March 2010 could be somewhere in the range of
3-3.5 per cent and 4-4.5 per cent, respectively, compared with 2.3 per cent in
March 2008. A more bearish scenario increases these ranges by 100 to 200 basis
points, while a more favourable scenario would lower them by around 50 basis
points.
The final outcome would depend on how difficult and prolonged the economic
slowdown is, as well as the future treatment of restructured loans by RBI, and
whether the latter would be willing to provide additional forbearance to banks
in this respect.
Private sector banks have been able to raise significant amounts of fresh
equity in the past few years by leveraging the favourable capital markets
conditions, both locally and internationally. This has allowed them to grow
their balance sheets at a faster pace than public sector banks," adds Mr
Nicolaides.
http://www.thehindubusinessline.com/2009/01/31/stories/2009013150561000.htm
ekamber
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