Credit costs to erode bank’s profits in FY17

India Ratings and Research (Ind-Ra), a part of Fitch group, has maintained a stable rating and sector outlook on private sector banks and a stable to negative sector outlook for public sector banks (PSBs) for financial calendar year 2017. Ind-Ra expects credit costs to increase sharply in FY16E and FY17, given the persistent stress from large levered corporates and increasing recognition of the stress by the banking system. Impaired assets are expected to rise to 12.5 per cent of loans by FY17 (including gross non-performing loans, standard restructured assets and asset reconstruction company receipts) compared to 10.8 per cent in FY15. Private sector banks continue to improve their funding profile, on the back of their growing market share in current and savings account deposits. Conversely, most PSBs continue to report high funding gaps and may see a negative impact on their margins from increasing requirements on liquidity coverage ratio and the guidelines relating to the marginal cost of funding based lending rate. Ind-Ra also expects the small finance bank and payment banks to lead the change in the banking landscape, by cornering increasing share of small ticket transactions and gaining market share in both granular liabilities and well as retail assets. Capital requirements towards Basel III transition continued to increase in FY16, despite Rs 700 billion as announced under the Indradhanush plan. Ind-Ra will watch out for any addition capital infusion announcement in the forthcoming union budget. The agency expects large private banks and the some large PSBs to be better placed with healthy internal accruals, strong capitalisation and better access to the capital markets. “Most PSBs are likely to be under pressure to consolidate growth and focus on profitability given their significant capital requirements both from government and capital markets,” the agency said in a statement. Ind-Ra has also assigned a stable outlook to small finance banks.