ICRA Ratings estimates that the rising bond yields would pose headwinds to the profitability of banks in Q1 FY2023, especially for public banks, given their higher holding of Government securities (G-Secs) of longer tenor. ICRA estimates mark-to-market (MTM) losses on bond portfolios of Rs. 80-100 billion for public banks and Rs. 24-30 billion for private banks in Q1 FY2023. Commenting further, Mr. Anil Gupta, Vice President, ICRA says: "Despite these expected MTM losses, we expect the net profits of the banks to remain steady, given the expected growth of 11-12% in their core operating profits in FY2023, which will more than offset the MTM losses. However, if the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY2023."
Contrary to trends of negative incremental credit during first quarter of a financial year, the incremental credit growth for banks remained significantly positive in Q1 FY2023 and was supported by credit growth across all segments. With rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in Q1 FY2023. To meet the funding requirements, large borrowers have shifted from debt capital market to banks, which also is aiding the improvement in the credit offtake. While rising interest rates may moderate credit demand in the coming quarters, we expect incremental bank credit offtake of Rs. 12.0-13.0 trillion (+10.1-11.0% YoY), well above the incremental bank credit offtake of Rs. 10.5 trillion (+9.7% YoY) in FY2022.
With 43% of the floating rate loans of banks linked to external benchmarks (77% of loans are floating for banks) and the higher increase in the external benchmark compared to the marginal cost of fund based lending rate (MCLR), rate transmission is expected to be faster for banks in this cycle. This, coupled with the lag in the upward repricing of deposits and improved credit growth, will aid the improvement in the operating profits of banks. Overall, with stable net profits, but an increase in the asset base, there could be a moderation in the reported return on assets (RoA). We expect RoA of 0.50-0.55% for public banks in FY2023 compared to 0.55% in FY2022 and 1.24-1.33% for private banks in FY2023 compared to 1.42% in FY2022.
In line with our expectations, gross slippages stood higher at Rs. 3.1 trillion (or 3.1% of standard advances) in FY2022 compared to Rs. 2.6 trillion (2.7%) in FY2021. However, the slippage rate in H2 FY2022 was lower at 2.4% compared to 3.7% in H1 FY2022 because of the second wave of the Covid-19 pandemic. While we remain watchful of the weakening macro-economic parameters and the performance of restructured loans, we expect that slippages could continue to moderate and remain at 2.5-2.7% of standard advances in FY2023. This would be driven by the reducing bounce rates and overdue loans across most banks.
The headline asset quality numbers continue to improve for banks with gross non-performing advances (GNPAs) of 6.0% (lowest in last six years, i.e. since December 31, 2015) and net NPAs of 1.7% (lowest in last nine years, i.e. March 31, 2013). With a lower slippage rate and better credit growth, we expect the GNPAs to decline further to 5.2-5.3% by March 31, 2023. The net NPAs may, however, remain range-bound at 1.6-1.8% as the recoveries and upgrades could moderate in the current year in the absence of restructuring.
Adds Mr. Gupta: "Notwithstanding the improving headline asset quality numbers, the stressed assets (net NPAs and standard restructured loans) stood at 3.8% of standard advances as on March 31, 2022, higher than the pre-Covid level of 3.1%. The performance of the restructured loans has not been very encouraging as ~Rs. 250 billion or 14% of the Covid restructured loans of Rs. 1.85 trillion slipped in H2 FY2022 and ~Rs. 145 billion or 8% was repaid by borrowers."
The capital profile of banks remains steady with a sequential improvement in the capital ratios for public as well as private banks. Even as the capital infusion by the Government of India into public banks was limited and fresh capital raise by private banks was much lower, improved internal capital generation supported the improvement in the Core Tier I (CET-I) capital ratios of these banks. The CET-I for public banks improved to 10.9% as on March 31, 2022 (10.4% as on March 31, 2021) and to 16.41% (16.21%) for private banks during the aforesaid period. The incremental capital requirements remain limited for most of the public banks and large private banks.
Overall, ICRA maintains the outlook for banks at Stable for FY2023, based on steady earnings, improvement in the headline asset quality numbers, capitalisation, solvency profile and limited incremental capital requirements.