Moderation In Asset Quality Pressure To Drive Earnings Growth For Banks

ICRA Ratings has said that improved asset quality and consequently lower credit provisions could drive better profitability for banks and provide impetus to lenders and rejuvenate their lending decisions.

"Low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year. This coupled with better competitive positioning of banks vis a vis other lenders driven by steep decline in cost of deposits could improve bank credit growth to 6.0-7.0% in FY2022 from an estimated 3.9-5.2% in FY2021 and 6.1% in FY2020," ICRA has stated.

As moratorium on loan repayments is over and though we await the Hon'ble Supreme Court directive of on asset classification, the Gross NPAs and Net NPAs for the banks are likely to rise in near term to 10.1-10.6% and 3.1-3.2% respectively by March 2021 from 7.9% and 2.2% respectively as of September 2020 and the resultant elevated credit provisions during H2 FY2021 as well. However Net NPAs and credit provisions will subsequently trend lower in FY2022 as the banks have reported strong collections on their loan portfolio with most banks reporting collections of over 90%," the ratings agency has stated.

Anil Gupta, Sector Head - Financial Sector Ratings, ICRA Ratings says, "With expectations of sustained collections and lower restructuring, the asset quality is expected to improve further with net NPA declining to 2.4-2.6% by March 2022. This will lead to lower credit provisions and better profitability in FY2022."

ICRA expect the credit provisions are estimated to decline to 1.8-2.4% of advances during FY2022 from an estimate of 2.2-3.1% in FY 2021 and 3.1% in FY2020, which will lead to improvement in return on equity (RoE) for banks. ICRA expect public banks to break-even after six consecutive years (FY 2016- FY 2021) of losses and generate RoE of 0.0-5.4% for FY 2022 ( -2.3% / 3.7% for FY 2021 and -6.5% for FY 2020). The RoE for private banks is also estimated to improve to 9.5-10.5% in FY 2022 (2.0-7.5% in FY 2021 and 6.5% for FY 2020).