India Ratings and Research (Ind-Ra) on February 17 revised the outlook on the overall banking sector to improving for FY23 from stable, as the banking system’s health is at its best in decades. The improving health trend that began in FY20 is likely to continue into FY23. Furthermore, key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of corporate capex cycle, the ratings agency said in a statement.
As the tightening liquidity would push up interest rates, and impacting treasure gains, it would at least partially offset in the short term as loans would get repriced faster than deposits as almost thirty three percent of the loans are linked to external benchmark rates.
The ratings agency has marginally revised its credit growth estimates to 8.4 percent from 8.9 percent for FY22 and 10 percent for FY23. It said the growth will be supported by a pick-up in economic activity post Q1FY22, higher government spending on infrastructure and a revival in retail demand, it said.
Ind-Ra estimates GNPA at 6.3 percent and stressed assets at 8.7 percent for FY22 and 6.1 percent and 7.6 percent respectively for FY23. Further it expects provisioning cost for FY22 at about 1.5 percent and 1 percent in FY23.
According to the agency, most private banks have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks are likely to witness continuing market share gains due to their superior product and service proposition.
Further, most old private banks will have to invest in technology further to be in the play, else they may not be able to offset the pricing benefit that large banks might offer. However, their asset quality challenges could be material, given their larger proportion of SME.
On PSBs, the agency expects growth across sectors and benefit from loan recoveries, considering their highest profitability in the past six years.