Global Banks Showing Tantalising Signs of Stability while Systemic Risk Remains High for Indian Banks, Says S&P
Moneylife Digital Team 22 July 2021
The global banking sector is clawing its way back to normalcy. Authorities' strong support for households and corporates over the course of COVID-19 has clearly helped banks. Lenders were also well-positioned going into the pandemic, after banks bolstered their capital, provisioning, funding, and liquidity buffers in the wake of the global financial crisis. 
 
S&P Global Ratings says it expects normalisation to be the dominant theme of the next 12 months, as rebounding economies, vaccinations and State measures help banks bounce back much more quickly than was conceivable in the dark days of 2020. Indian banks face high systemic risk in the wake of COVID resurgence and significant weak loans, it added.
 
Gavin Gunning, credit analyst at S&P Global Ratings, says, "We see less downside risk for banks as economies rebound, vaccinations kick in, and banks feel the stabilizing effects of state intervention."
 
"With no vaccine in October 2020, we believed at the time that 2021 could be a very difficult year for banks. State intervention on behalf of corporates and households--including significant fiscal and monetary policy support--is working and banks have benefited," says Mr Gunning. 
 
S&P's net negative outlook for the global banking sector improved to 1% in June 2021 from 31% in October 2020. As at 25 June 2021, about 13% of bank outlooks were negative. This, the ratings agency says, is significantly lower than in October 2020 when about one-third of rating outlooks on banks were negative.
 
The ratings agency's base case is that the global banking sector will continue to slowly stabilise as the economic rebound gains momentum and as support is gradually withdrawn. It says, "Should a re-intensification of risks occur, this would require more support from public authorities for the real economy.” 
 
"For 11 of the top 20 banking jurisdictions we estimate that a return to pre-COVID-19 levels of financial strength won't occur until 2023 or beyond. For the other nine, we estimate that recovery may occur by year-end 2022," it added.
 
S&P says, as this recovery unfolds, it is watching five key risks: slow vaccination rollouts and new variants may disrupt economies; a surge in leverage and high levels of corporate insolvency may strain banks; a disorderly reflation and market disruption could hurt borrowers and banks; low rates may continue to challenge banks' business models; and property risks may yet intensify, adding to banks' problem loans.
 
"There is an inevitable lag effect on banks' credit profiles as household and corporate borrowers recover from the pandemic," says Alexandre Birry, credit analyst at S&P Global Ratings. "While bank profitability will unquestionably remain muted in the continuing ultra-low interest rate environment, lenders are better capitalized, more liquid, and less leveraged compared with where they were in 2009, the last period of significant global banking strains." 
 
Commenting on the situation on Indian lenders, Deepali V Seth Chhabria, primary credit analyst of S&P Global, says Indian banks are facing high systemic risk due to COVID resurgence and significant weak loans. 
 
She says, "Banks' are increasing capital buffers and reserves to help absorb the risks. Weak non-bank financial companies (NBFCs), however, are likely to get marginalised, while the stronger ones will gain market share and benefit from differentiated funding access. Measures from the Union government and Reserve Bank of India (RBI) should provide some respite."
 
Banks in India continue to raise capital from the equity markets and the government, which is the majority shareholder in public sector banks (PSBs), to strengthen their balance sheet. "We forecast banks' return on average assets (RoAA) to remain 0.7% in fiscal 2022, similar to fiscal 2021, but better than the 0.1% in fiscal 2020," the ratings agency says.  
 
Banks have already created COVID-related provisions to the tune of 0.5%-1.5% of loans. 
 
Additionally, RBI has allowed banks to use all other floating and countercyclical provisions to create specific provisions against non-performing loans (NPLs). This, according to S&P should help absorb the hit from COVID-19-related losses and pave the path for recovery.
 
The ratings agency sees banking sector's weak loans to remain elevated at 11%-12% of gross loans in the next 12-18 months and credit losses to stay high at 2.2%, before recovering to 1.8% in fiscal 2023. 
 
"Small and midsize enterprises (SME) segment and low-income households will be the worst affected. Tourism and recreation related sectors, commercial real estate, and unsecured retail loans could contribute to higher NPLs. Government initiatives should alleviate system stress," it added.
 
S&P expects NPL recoveries under the insolvency and bankruptcy code (IBC) to regain momentum in fiscal 2022, as new cases can resume under the IBC and the economy rebounds. The establishment of a bad bank to manage lender's troubled assets could speed up resolution of NPLs. That said, it says, India's challenge has always been execution.
 
According to the ratings agency, performance of NBFCs would be a mixed bag over the next year. It says, "Collection efficiency dropped during the second wave. Companies catering to prime borrowers typically were less impacted. Housing finance, excluding affordable housing, and gold loans could be less affected compared with financing for micro enterprises or commercial vehicles." 
 
"Government schemes have ensured good liquidity for the NBFC sector. As a result, financing costs have fallen sharply for some. We could see differentiated business niches with weaker NBFCs resorting to originate and distribute models," it added.
 

 

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