Economic risks constrain Indian and Chinese banks: S&P

SINGAPORE - Banks in India and China will continue to face pressures on their asset quality, profitability, and capitalisation over the next 12-24 months, according to ratings agency Standard and Poors. "We expect economic risks to remain high for Indian and Chinese banks, which will constrain their credit profiles," said S&P Global Ratings credit analyst, Geeta Chugh.

"India's economic risk trend is negative. Prolonged weakness in the asset quality of Indian banks could lead us to assess that economic risks have increased."

S&P anticipates that nonperforming loan ratios of Indian banks with high exposure to companies in troubled sectors will continue to rise. For
Chinese banks, continuing weak cash flows for companies are likely to worsen asset quality for lenders.

"Asset quality for Indian and Chinese banks is likely to remain under pressure due to slow industrial recovery in India and overcapacity in many Chinese industries," adds Chugh.

Interest-rate liberalisation and deepening debt capital markets in India could weaken the banking sector's net interest margin (NIM). Likewise, China's financial reforms, local government debt swaps, and deepening domestic debt capital market will shrink bank profitability and asset yield, the report notes.

"We believe that NIMs will compress for Indian banks with corporate focus and higher bad loans. Banks are also likely to reduce lending rates further, after having cut base lending rates by 70-90 bps in the past few quarters," said S&P Global Ratings credit analyst Amit Pandey.

"Continuing high credit costs will also limit any meaningful improvement in profitability."

S&P Global Ratings expects Indian banks to have sizable capital needs to support growth and meet Basel III requirements, which kicked in on April 1,
2013, and will gradually increase until 2019. Chinese banks are also likely to maintain strong momentum of capital-instrument issuance.

"Most Indian public sector banks will have to rely on external capital infusion, given their reduced ability to generate internal capital, largely
because of the pressure on asset quality in the past few years," says Chugh.

"In view of the potential shortfall in capital, India's public sector banks will need to continue to explore other funding options, including additional Tier-1 issuance, and funding from insurance companies or equity capital markets.

“Credit growth in India has fallen sharply, reflecting the weak corporate credit demand as well as capital challenges that most public sector banks are facing.
“We expect loan growth in India's banking sector to be 11%-13% in fiscal 2017. We anticipate that corporate capital spending will be weak, given low capacity utilisation and high leverage in certain sectors.

“China's credit growth has also been on a downward trend, the report notes. S&P Global Ratings believes slower credit growth is necessary to support long-term macro-economic stability.”  www.standardandpoors.com (ATI).