India Ratings offers stable outlook for banking in 2014

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Maintaining a stable outlook on the banking sector in 2014, India Ratings today said higher provisions for loan losses and capital infusion from the Government in public sector banks will make lenders resilient to any cyclical downturn.

"Banks are expected to remain largely resilient to the cyclical downturn as increases in loan loss provisions and common equity injections in 2014 will likely help them maintain adequate defences," Ananda Bhoumik, Senior Director and Head (Financial Institutions) at India Rating, said.

Bhoumik was talking to reporters while releasing a report, '2014 Outlook: Banks-Resilient, but finely posied'.

"These factors underline the stable outlook for the banking sector this calendar year, even as it continues to face credit quality pressures from loan concentration, borrowers' overleverage and the prevailing economic slowdown."

Attributing regulatory provisions to increase in loan loss reserves, Bhoumik said the reserves are likely to exceed 70 per cent of gross NPAs from the current 66 per cent.

"Regulatory measures are forcing banks to improve loan loss reserves on restructured loans and exposures to corporates with large unhedged forex liabilities."

"The removal of provisioning forbearance on restructured accounts from FY16 will improve loan loss reserves further," the report said.

It said the Government's estimated equity injection of $ 23 billion till FY18 provides considerable rating stability for Government banks and comfort to senior creditors.

The larger private banks are expected to maintain their above-average capitalisation levels based on better access to the equity capital markets, the report noted.

In a base case scenario, return on assets of government banks will continue to trend 15-20 basis points lower than the long-term average of 0.9 per cent, but still adequate to absorb rising credit costs without impacting capital for most banks, Bhoumik said.

He further said stressed assets may reach 14 per cent of loans by March 2015 from 9 per cent in March 2013.

"By then, improvement in industrial activity on the back of a gradual pick-up in the investment cycle could slow NPAs accretion and improve recoveries in most sectors," Bhoumik said.

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