Tag: credit costs

S&P, BFSI News, ET BFSI

Banking & Finance

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Credit losses for Asia-Pacific banks could reach $585 billion by 2022, or nearly double the pre-Covid level raising credit costs for banks, according to S&P Global.

The credit costs of the Indian banking system may rise to 2.4 per cent by March 2022, compared to a base case of 2.2 per cent, according to the S&P report, “Intervention Worked: Credit Losses Set To Decline For Most Asia-Pacific Banks”.

“In India and Indonesia, where banks have suffered higher asset distress in recent years, the credit losses are set to trend closer to our expected long-term average in the coming years,” said S&P.

Moratorium cushions blow

S&P said moratoriums on loan repayments–together with fiscal, monetary, and policy support–have helped cushion the blow to borrowers in Asia-Pacific from the Covid outbreak and containment measures.

Credit losses are set to fall across most Asia-Pacific banking systems over the next two years, partly because targeted assistance to stretched borrowers will likely continue in many places until pandemic-related challenges substantially abate.

S&P forecasts that credit losses will remain well below its expected long-term average in most countries despite last year’s economic hardship. Credit losses encompass provisioning for expected bad loans, and generally precede charge-offs, the actual write-down of loans that detract from the balance sheet allowances for credit losses

Extended troubles

S&P said the effect of Covid on credit costs in the country will be extended over several years.

“Given the scale of the supports to banks and borrowers, downside risks will stay elevated.

“Besides moratoriums and fiscal support, temporary lenient regulatory and accounting treatment of stressed borrowers will also be lifted over time. And new waves of Covid remain a threat,” it said.

S&P said Asia-Pacific banks should safely avoid a ‘cliff effect’ even as extensive relief measures are progressively removed.

The report said while China‘s banks has taken much of its pandemic-related pain up front, with large credit losses reported in 2020, the fallout is not quite over.

Given the vast size of the country’s banking system, this translates into big numbers, it said.

The report discussed forecast credit losses for the 12 larger banking systems in Asia-Pacific: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan, and Thailand.



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Banks’ impaired loans and credit costs to rise: Fitch

Banking & Finance

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Indian banks’ improved financial metrics do not fully reflect the impact of the coronavirus pandemic, cautioned Fitch Ratings.

The global credit rating agency expects both impaired loans and credit costs to rise as forbearance and easy-liquidity conditions ease even as it projected India’s real GDP growth at 11 per cent in FY22.

Also read: RBI allows AD Cat-I Banks to post and collect margin in India

Fitch believes the state-led banks are more vulnerable than private banks, given their participation in relief measures, while their earnings and core capital buffers are weak.

The agency observed that the operating environment remains challenging as the banking sector tries to balance a gradually recovering economy with preserving moderate loss-absorption buffers.

Pressure on retail, stressed SMEs loans

Indian banks’ aggregate non-performing loan (NPL) ratio fell to 7.2 per cent by end-December 2020 (end-March 2020: 8.5 per cent).

Fitch said NPLs exclude unrecognised impaired loans under judicial stay, restructured loans, loans under watch and loans overdue by 60 plus days, which formed 4.2 per cent of loans.

It underscored that average contingency reserves of 0.7 per cent of loans are inadequate to absorb heightened stress, although private banks are well above the average.

Fitch sees high risk of a protracted deterioration in asset quality with more pressure on retail and stressed SMEs loans (8.5 per cent of loans, 1.7 per cent state guaranteed).

Credit growth

Credit growth was weak at 4.5 per cent in the first nine months of the financial year ending March 2021 (9MFY21), in line with Fitch’s expectations, as banks remained risk averse.

Fitch said private banks are better poised to tap growth opportunities in 2021 as their higher contingency reserves offer better earnings and capital resilience.

The state-led banks’ average buffer between pre-provision profits and credit costs is only 160 basis points (bps) versus 340 bps at private banks, it added.

State-run banks: Limited core capital

Fitch assessed that state-led banks also have limited core capital buffers (average common equity Tier 1 ratio: 9.8 per cent) in the event of further asset stress, which is unlikely to be remediated solely via the state’s planned capital injections of $5.5 billion (0.7 per cent of risk-weighted assets) in FY21 and FY22.

Also read: India needs to make efforts to get rating upgrade in line with fundamentals: CEA

The agency emphasised that the plan is well below its estimated capital requirement of $15 billion to $58 billion under varying stress scenarios.

The strategy to either not lend or lend only to capital-efficient sectors is likely to continue as low market valuations leave state-led banks with limited scope to access fresh equity on their own, it added.

Stress among retail customers

Fitch said the faster-than-expected GDP rebound in 3QFY21 (October-December 2020) is positive, but many sectors continue to operate well below capacity.

In addition, the decline in private consumption (3QFY21: -2.4 per cent), and reports of rising urban utility bill defaults and social security withdrawals point towards stress among retail customers.

Fitch believes that the SME sector faces a litmus test in FY22 as short-term credit support extended in FY21, which, in its view, deferred the recognition of stress, comes up for refinancing.

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