Moderation in asset quality pressure to drive earnings growth for banks: ICRA

New Delhi [India], December 29 : Improved asset quality and consequently lower credit provisions can drive better profitability for banks and provide impetus to lenders and rejuvenate their lending decisions, ICRA Ratings has said.
Low interest rates, improved business volumes, better job prospects and income levels can also stimulate credit demand next year, it added.
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 to 7 per cent in FY2022 from an estimated 3.9 to 5.2 per cent in FY2021 and 6.1 per cent in FY2020.
As moratorium on loan repayments is over and the Supreme Court's directive of on asset classification is awaited, the gross NPAs and net NPAs for the banks are likely to rise in near term to 10.1 to 10.6 per cent and 3.1 to 3.2 per cent respectively by March 2021 from 7.9 per cent and 2.2 per cent respectively as of September 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 per cent.
Accordingly, ICRA revised its loan restructuring estimates downward to 2.5 to 4.5 per cent of advances as against 5 to 8 per cent estimated earlier.
"With expectations of sustained collections and lower restructuring, the asset quality is expected to improve further with net NPA declining to 2.4 to 2.6 per cent by March 2022," said Anil Gupta, Sector Head for Financial Sector Ratings. "This will lead to lower credit provisions and better profitability in FY2022."
ICRA expects the credit provisions are estimated to decline to 1.8 to 2.4 per cent of advances during FY2022 from an estimate of 2.2 to 3.1 per cent in FY 2021 and 3.1 per cent in FY2020, which will lead to improvement in return on equity (RoE) for banks.
The agency expects public banks to break-even after six consecutive years (FY 2016 to FY 2021) of losses and generate RoE of 0 to 5.4 per cent for FY 2022. The RoE for private banks is also estimated to improve to 9.5 to 10.5 per cent in FY 2022.
The capital position for large private banks is strong and can withstand the stress case scenario for asset quality after these banks raised Rs 54,400 crore of capital during 9M FY 2021.
With large capital raise and expectations of improved profitability, the banks are also well placed to exercise call options on their Rs 26,000 crore of AT-I bonds falling due in FY 2022 and FY 2023 without a significant impact on their capital.
ICRA expects capital requirements for private banks to be limited to few mid-sized and small private banks at less than Rs 10,000 crore till FY2022.
The AT-I bond market for public banks has revived in current year with more public banks issuing AT-I bonds as compared to last year. In addition, few public banks have been also able to raise equity capital totalling Rs 7,500 crore from markets after a long gap of almost three years.
This coupled with the government's budgeted equity capital infusion of Rs 20,000 crore for FY 2021 should suffice for FY 2021.
"Public banks will need to raise additional capital of up to Rs 43,000 crore next year as they have call options falling due on the AT-I bonds totalling Rs 23,300 crore during FY 2022," said Gupta.
"Capital will also be required to support credit growth as their internal capital generation could remain weak even next year. Ability of public banks to raise capital from markets will be critical to reduce the government's recapitalisation burden next year," he added.