Pressured banks

Banks in India and China will continue to face pressures on their asset quality, profitability, and capitalization over the next 12-24 months, says a report by S&P Global Ratings on August 2, 2016.

The report “Economic Woes Cast A Shadow On Indian And Chinese Banks,” that S&P compares banks in these two countries on parameters such as asset quality, profitability, capitalization, and credit growth.

Further details on how individual banks stand on various rating components are available in another report, titled “Ratings Component Scores For The Rated Indian And Chinese Banks — July 2016,” that S&P Global Ratings also published today.

“We expect economic risks to remain high for Indian and Chinese banks, which will constrain their credit profiles,” said S&P Global Ratings credit analyst Geeta Chugh.

“India’s economic risk trend is negative. Prolonged weakness in the asset quality of Indian banks could lead us to assess that economic risks have increased,” Chugh said.

S&P Global Ratings anticipates that non-performing loan ratios of Indian banks with high exposure to companies in troubled sectors will continue to rise.

For Chinese banks, continuing weak cash flows for companies are likely to worsen asset quality for lenders.

“Asset quality for Indian and Chinese banks is likely to remain under pressure due to slow industrial recovery in India and overcapacity in many Chinese industries,” added Chugh.

Interest-rate liberalization and deepening debt capital markets in India could weaken the banking sector’s net interest margin (NIM).

Likewise, China’s financial reforms, local government debt swaps, and deepening domestic debt capital market will shrink bank profitability and asset yield, the report notes.

“We believe that NIMs will compress for Indian banks with corporate focus and higher bad loans. Banks are also likely to reduce lending rates further, after having cut base lending rates by 70-90 bps in the past few quarters,” said S&P Global Ratings credit analyst Amit Pandey.

“Continuing high credit costs will also limit any meaningful improvement in profitability,” added Pandey.

S&P Global Ratings expects Indian banks to have sizable capital needs to support growth and meet Basel III requirements, which kicked in on April 1, 2013, and will gradually increase until 2019.

Chinese banks are also likely to maintain strong momentum of capital-instrument issuance.

“Most Indian public sector banks will have to rely on external capital infusion, given their reduced ability to generate internal capital, largely because of the pressure on asset quality in the past few years,” Chugh said.

“In view of the potential shortfall in capital, India’s public sector banks will need to continue to explore other funding options, including additional Tier-1 issuance, and funding from insurance companies or equity capital markets,” she continued.

Credit growth in India has fallen sharply, reflecting the weak corporate credit demand as well as capital challenges that most public sector banks are facing.

“We expect loan growth in India’s banking sector to be 11%-13% in fiscal 2017. We anticipate that corporate capital spending will be weak, given low capacity utilization and high leverage in certain sectors.

China’s credit growth has also been on a downward trend, the report notes.

S&P Global Ratings believes slower credit growth is necessary to support long-term macroeconomic stability. fii-news.com