Here’s why banking sector just got a thumbs up
Domestic conditions for bank credit growth are likely to remain favourable, which, along with benign asset quality pressures, will translate into a strong earnings profile for the sector. This has prompted credit ratings firm ICRA to revise its outlook on the banking sector to positive.
The improved growth and earnings outlook has also improved investors’ appetite, which will also enable banks to raise capital from the markets, if required.
Incremental credit growth in the year ending March 2023 is expected to remain at an all-time high of Rs 18-19 trillion, significantly higher than the previous high of Rs 11.4 trillion in FY19.
Further, the growth momentum is expected to remain strong in FY24 as well, even though rising interest rates and tight liquidity conditions could moderate the growth, according to the rating agency.
While the retail, MSME and agriculture have been the key segments for credit growth in the recent past, rising yields for overseas borrowings and in domestic capital markets have created a conducive demand environment for wholesale funding from banking channels. As of November 18, 2022, credit expansion was impressive at Rs 10.6 trillion, representing a decadal high YoY growth of 17.6%.
The gross slippage (or fresh NPA) rate also stood at a decadal low of 2.2% in H1 FY23 (lowest since FY12) and given the granular nature of the fresh slippages, the recoveries/upgrades have been better, leading to lower net slippages as well as credit losses. With the relatively better health of the corporate sector, the asset quality outlook also remains strong and the Gross NPAs and Net NPAs are estimated to decline to 3.9-4.3% and net NPAs at 1.1- 1.3% by March 2024.
Sale of NPAs under the asset reconstruction companies (ARCs) could further moderate these headline metrics. Notwithstanding the ongoing rise in deposit cost and expected moderation in the interest margins, ICRA expects better credit growth and the benign credit cost environment to support the overall profitability of banks.
It estimates that the return on assets (RoA) and the return on equity (RoE) will improve to 1.2-1.3% and 16.1-16.8%, respectively, by FY24 against 0.9-1% and 12.9-13.9%, respectively for FY23.
As of September 30, 2022, the Tier I capital for public and private banks stood at 12.1% and 16% respectively, which was comfortable in relation to the regulatory requirements of 9.5%.
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