Moody’s cuts outlook on Indian banking system to negative

Moody's Investors Service has downgraded its outlook for India's banking system to negative from stable due to concerns that an increasingly challenging operating environment will adversely affect asset quality, capitalisation, and profitability.

"India's economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates.

"At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing programme of the Indian Government, which could drain funds away from the private credit market," said Mr Vineet Gupta, Vice-President and Senior Analyst, Moody’s.

The credit rating agency’s latest outlook for the Indian banking system is valid for the next 12-18 months.

Given the tightening environment, Moody’s is anticipating that the asset quality will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013. 

Loan growth, a stress on banks' capital

The rating agency expects loan growth to be a strain on the banks' capital over the horizon of this outlook. As monetary conditions tighten and economic activities slow, it sees bank loan growth to fall to 16-18 per cent in FY2012 and FY2013, from 21 per cent in FY2011 

Profitability to come under pressure

When it comes to profitability, Moody’s expects it to come under pressure due to lower interest margins as deposit rates re-price and get a further push from the latest liberalisation on savings deposit rates.

Bank ratings may come under downward pressure, although currently, the negative outlook on the banking system contrasts with the stable outlook assigned to the bank financial strength ratings of 14 of the 15 rated banks, said the agency in a statement.

For those banks with weaker capital ratios on average and higher asset quality pressures, their standalone ratings are likely to come under pressure as underscored by Moody's downgrade of the State Bank of India's banking financial strength rating to ‘D+/Stable/Baa3’ from ‘C-/Stable/Baa2’ on October 4.

But, on the positive side, Moody's has recognised Indian banks' stable customer deposit base and high level of Government securities holdings, which provide them with a resilient funding and liquidity profile that buffer them against destabilising shocks.

Moody's also expects the Government to remain committed towards providing support to both public and 'private' banks. Such potential support translates to an average one-notch uplift to the banks' debt and deposit ratings to ‘Baa2’, compared with their standalone base line credit assessment of Baa3.

Moody's rates 15 commercial banks in India, which together account for about 66 per cent of the banking system's total assets as at March 2011.

The banking system is dominated by public-sector banks, which account for around 75 per cent of the market in asset terms. The weighted average stand-alone banking financial strength rating is ‘D+’, and mapping to a Baseline Credit Assessment of ‘Baa3’. The average long-term deposit rating is ‘Baa2/Prime-2’.