Indian Banks’ Q2 Results Confirm Asset Quality Decline, Says Fitch

Non-performing loans (NPLs) will rise over the next year for Indian banks as the economic downturn continues, according to Fitch Ratings. Recent asset quality trends at both large and mid-sized government banks confirm the credit ratings agency’s (CRA) forecast that the Indian banking system’s reported gross NPL ratio will rise close to 4.2% for the year to March 2013 (FY13). The proportion of restructured assets (not included in the reported NPLs) has also increased sharply. The total NPL and restructured assets ratio may well exceed 10% at FY13.

The average NPL ratio for the top 10 government banks is approximately 3.7%. The State Bank of India (SBI), which started to address its asset quality problem relatively early, reported an increase in NPLs to 5.15% at end-September 2012, from 4.19% a year ago but accompanied by a far lower share of restructured assets. Fitch expects SBI’s NPL ratio to be one of the first to level off.

Asset quality pressure is increasingly visible at other large government banks, which have reported sharply higher NPLs in last two quarters. Fitch believes this trend will continue with the other banks as the effect of the economic slowdown is fully reflected in their asset quality performance.

The CRA believes prolonged stress in the infrastructure sector will put the greatest pressure on asset quality and could cause problem loans to spike – as most of the stressed exposures are currently classed as restructured assets. Since 2007, the infrastructure boom has led to a concentration in lending to the sector and to single names, particularly power utilities. Small and medium-sized Indian banks, such as UCO and Vijaya, with concentrated regional profiles are viewed as most vulnerable if stress levels increase. Larger banks, such as SBI and Bank of Baroda, with diversified loan portfolios and better funding profiles, should be able to absorb losses through profits alone.

At the end of the first-half of FY13, gross NPLs in the 10 largest government banks rose by about 60% from a year earlier and by 32% from end-FY12. These banks also account for the bulk of the NPL stock and restructured assets and are likely to see further pressure from the impact of slowdown in the next few quarters. Government banks account for over 70% of the Indian banking system assets and are a key driver in shaping system averages. NPLs at the three largest privately-owned banks in India stand at an average of just 1.9%.

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