India Ratings and Research (Ind-Ra) has revised its outlook on the banking sector to Negative for 2HFY21 from Stable. This is in view an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of COVID-19. Additionally, capital buffers for most public sector banks (PSBs) remain modest, as per Ind-Ra's bear case, the spike in stressed assets due to pandemic is expected to double the credit costs for banking system than estimated pre-COVID-19 levels for FY21.
Negative Outlook on PSBs:
The agency has revised the rating outlook on PSBs to Negative for 2HFY21 from Stable. "PSBs' modest capital buffers are expected to deplete further in FY21, due to provisioning requirements. Also, pre-COVID profitability expectations for FY21 would be belied and most banks are likely to report net losses. They may also need to continue to build-up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23. PSBs' could require INR350 billion-550 billion in 2HFY21 for Tier 1 ratio of 10%. COVID-19 / contingent provisions are much lower than that for private banks," Ind-ra has stated.
Stable Outlook for Private Banks:
Ind-Ra has maintained a Stable outlook for private banks, as they are better placed to withstand the challenges presented by the pandemic. "Most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio. While the system's credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, large banks may benefit from credit migration. As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months," the rating agency has noted.