Indian banking is making a strong recovery as asset quality improves and profitability stabilises, said global rating agency Standard and Poor’s (S&P) on Thursday.
Lenders, for Financial Year 2022-23 (FY23), reported their best results in a decade. "Indian banks' earnings will likely remain healthy. The sector has improved substantially in the past seven years," said Deepali Seth Chhabria, S&P Global Ratings credit analyst.
The profits come from higher net interest margins and lower credit costs. The system-wide return on average assets (ROAA) was estimated at 1.2 per cent for FY23. System-wide ROAA will likely hover around 1.1 per cent in FY24.
"The formation of new nonperforming loans will remain at cyclical low levels, despite pressure from higher interest rates," said Geeta Chugh, S&P Global Ratings credit analyst. "A recovery in written-off accounts is also boosting the profitability of banks."
India's strong economic performance is bolstering the banking sector. S&P forecasts the country will grow at six-seven per cent annually until 2026 at least, making India the fastest-growing economy in the Asia Pacific and the fastest-growing large economy globally.
Indian banks' improvements are significant, but not universal. State Bank of India (SBI), which is owned by the government, and top private banks have addressed their asset quality challenges. However, several large public sector banks are still saddled with a relatively high volume of weak assets, which will result in higher credit losses and hit profitability.
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Banks are showing improvement in new non-performing loan formation (or slippage) and credit costs, but we expect these lenders to underperform the industry, said the agency.
