Improving trend in asset quality; GNPA ratio to touch a decade low of 4%
- Over the past few years, the aggressive cleanup by Banks has resulted in a sharp decline in stressed assets. The mix of PSU and AA and above assets has risen to 77% in FY22 v/s 59% in FY17, while the mix of sub-investment grade assets have almost halved to 7% v/s 17%.
- Credit ratio witnessed an improvement in FY22 and is likely to continue its upward trajectory. However, rising inflation can impact cash flows of the corporates, primarily MSME, which remains a key monitorable.
- Total restructuring book for the system stood ~2% of loans, while the same for MSME stands elevated at 6%, of which 25% is expected to slip into NPA. However, the impact on overall asset quality is likely to be limited.
- Slippages are expected to moderate to 2% in FY23 v/s 2.5% in FY22. The GNPA ratio is expected to moderate to a decade low of sub-4% by FY24. The GNPA ratio for the Corporate/Retail/MSME/Agri segment is likely to moderate to sub-2%, 1.8-2%, 10-11%, and 9-10%.
Credit cost continues to trend lower; return ratios to improve to 1% in FY23
Banks have significantly increased their PCR to 73% in FY22, which, coupled with a lower expectation of slippages, will keep the provisioning requirement controlled. As a result, credit cost will witness a downward trajectory, thereby aiding profitability. CRISIL believes that treasury losses have peaked in 1QFY23, which will further aid profitability. Credit cost is expected to moderate to 0.7% in FY23, while RoA is likely to improve to 1% in FY23. RoA is likely to improve to 0.7%/1.6% for PSBs/Private Sector Banks (v/s 0.3%/1.2% in FY21).
Capitalization levels have improved; incremental requirement to be lower
- Capitalization levels for the bank have improved significantly over the past few years and are well-paced at decade highs. As per CRISIL, all PSBs have a Tier I buffer of over 100bp v/s 24% in FY18. CAR currently stands at 15.6%, which has been the best in the past two decades.
- While the government has infused majority of the capital in PSBs, many Banks have been able to raise capital from the market in the past one-year, which is likely to pick up gradually as the earnings profile of the PSBs improves further. Over the past five-years, PSBs have raised ~INR3.5t (including government infusion) and Private Banks INR1.4t. CRISIL feels the incremental requirement for capital is likely to be lower in the coming years, given the improved levels.
- Over the past few years, the aggressive cleanup by Banks has resulted in a sharp decline in stressed assets. The mix of PSU and AA and above assets has risen to 77% in FY22 v/s 59% in FY17, while the mix of sub-investment grade assets have almost halved to 7% v/s 17%.
- Credit ratio witnessed an improvement in FY22 and is likely to continue its upward trajectory. However, rising inflation can impact cash flows of the corporates, primarily MSME, which remains a key monitorable.
- Total restructuring book for the system stood ~2% of loans, while the same for MSME stands elevated at 6%, of which 25% is expected to slip into NPA. However, the impact on overall asset quality is likely to be limited.
- Slippages are expected to moderate to 2% in FY23 v/s 2.5% in FY22. The GNPA ratio is expected to moderate to a decade low of sub-4% by FY24. The GNPA ratio for the Corporate/Retail/MSME/Agri segment is likely to moderate to sub-2%, 1.8-2%, 10-11%, and 9-10%.
Credit cost continues to trend lower; return ratios to improve to 1% in FY23
Banks have significantly increased their PCR to 73% in FY22, which, coupled with a lower expectation of slippages, will keep the provisioning requirement controlled. As a result, credit cost will witness a downward trajectory, thereby aiding profitability. CRISIL believes that treasury losses have peaked in 1QFY23, which will further aid profitability. Credit cost is expected to moderate to 0.7% in FY23, while RoA is likely to improve to 1% in FY23. RoA is likely to improve to 0.7%/1.6% for PSBs/Private Sector Banks (v/s 0.3%/1.2% in FY21).
Capitalization levels have improved; incremental requirement to be lower
- Capitalization levels for the bank have improved significantly over the past few years and are well-paced at decade highs. As per CRISIL, all PSBs have a Tier I buffer of over 100bp v/s 24% in FY18. CAR currently stands at 15.6%, which has been the best in the past two decades.
- While the government has infused majority of the capital in PSBs, many Banks have been able to raise capital from the market in the past one-year, which is likely to pick up gradually as the earnings profile of the PSBs improves further. Over the past five-years, PSBs have raised ~INR3.5t (including government infusion) and Private Banks INR1.4t. CRISIL feels the incremental requirement for capital is likely to be lower in the coming years, given the improved levels.
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