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Informist, Tuesday, May 20, 2025

 

--Fitch: 50 bps RBI rate cut, tax cuts to buoy consumer, business sentiment 

--Fitch: See further upside to India bks' viability rtg if past gains sustain 

--Fitch: India bks' govt-support driven issuer default rtg unlikely to change 

--Fitch: Tariff uncertainties a challenge but risks for Indian bks manageable

 

MUMBAI – Fitch Ratings expects a further upside to Indian banks' viability ratings if the recent improvement in their performance sustains, the agency said in a research note Tuesday. However, the banks' government-support driven issuer default ratings are likely to remain unchanged, as these rely on expectation of extraordinary support from the Indian government which is rated 'BBB-', Fitch said.

 

The recent upgrades in ratings of Punjab National Bank, Union Bank of India, Bank of India, and Bank of Maharashtra reflect the banks' improved underwriting and a more diversified loan mix, which has led to better asset quality and hence the upgrade, Fitch said. 

 

Despite their rising systematic importance, private banks are rated one notch below state-owned banks due to a lesser probability of support stemming from their private ownership, Fitch said. ICICI Bank's viability rating has been upgraded to reflect sustained asset quality and profitability improvements, alongside stronger core capitalisation than at peers, which the rating agency expects ICICI Bank to maintain in the near to medium term.

 

Although risks for banks have been managed through improved underwriting and economic expansion, the risk assessment is an unfavorable adjustment factor for Bank of Baroda and Canara Bank, leading to viability ratings that are less than their implied ratings. "This highlights the importance of effective risk management amid high growth in recent years and intense competition within India's banking sector," Fitch said. 

 

These ratings reflect the government's high propensity to support its banks, driven by its majority controlling ownership as well as banks' significant market shares and quasi-policy roles, Fitch said. "We believe a default by any of the large state banks could severely undermine depositor and market confidence in the sector, posing reputational risk for the state," it said. 

 

The rating agency believes that the government would prioritise direct support for state-owned banks over large private banks, given the state's limited financial resources and majority ownership in state-run banks. 

 

The ratings for Indian banks is also supported by expectations of improved economic performance and the sheer size of the Indian economy, Fitch said. It forecasts India's real GDP growth at above 6% until the financial year ending March 2027. "Growth should be supported by increased capital spending and stable economic conditions through reasonably well-controlled consumer inflation, low dollarisation, steady house prices and low household leverage," the rating agency said.

 

Fitch believes that risks from the imposition of US tariffs are manageable for the banking sector though they might pose some challenges. India's underbanked economy offers profitable business avenues for banks provided the asset quality risks are managed, Fitch said. The 50 basis points reduction in the repo rate by the Reserve Bank of India, and the cut in income tax announced in the Union Budget are expected to boost consumer sentiment and support demand for credit, the rating agency said. 

 

"The Reserve Bank of India's commitment to systemic stability through monetary and macroprudential measures, along with its ability to influence risk appetite, such as by using regulation to alter loan sentiment – for instance, by adjusting risk weights at non-bank financial institutions – should help sustain economic expansion," Fitch said. Fitch expects slower-to-stable loan growth in FY25 and FY26 at most of the banks, after two consecutive years of mid-teen growth, it said.

 

Fitch also expects the banks to moderate loan growth to better manage the loan-to-deposit ratios and funding costs, but there could be upside to growth upon sustained liquidity easing by the Reserve Bank of India. "We expect the banks to continue utilising excess investments in government securities to meet loan growth needs, albeit at a slower pace, balancing the growth with deposit accretion rates," it said.

 

Majority of the Indian banks are rated below the implied 'bbb' category score, despite their strong franchises as the state owned banks face government influence, while the private banks are constrained by aggressive competition and focus on higher-risk segments, like unsecured retail and small and medium enterprise lending, Fitch said. 

 

The rating agency believes that there is scope for risk profile scores of Indian banks to be further raised, but it expects them to stay below the operating environment and business profile scores, unless banks consistently demonstrate an ability to control risk through economic cycles. 

 

Banks' credit costs will be affected due to rising slippages and reduced write-backs from legacy bad loan recoveries. "However, banks with higher unsecured loan exposure could face faster increases, given accelerated regulatory provisioning norms," Fitch said. 

 

Net interest margins of banks are also expected to remain under pressure due to declining policy rates and contracting yields on advances, Fitch said. Slower loan growth and shift towards secured lending will also weigh on the margins, it said. However, Fitch expects margin pressure to be partly offset by the Reserve Bank's easier liquidity stance. Bank of Maharashtra, ICICI Bank and Axis Bank have higher net interest margins than peers amid a focus on high-yield lending and controlled funding costs, it said. 

 

According to Fitch the operating profit of Indian banks has peaked. "We anticipate a gradual moderation in profitability due to slightly narrower margins and rising credit costs," it said.  End

 

Reported by Kabir Sharma

Edited by Vandana Hingorani

 

 

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