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S&P Global — 23 Aug, 2022

Daily Update: August 23, 2022

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By S&P Global

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

India’s Banks at an Inflection Point

India’s banking sector has historically been dominated by public sector banks. These banks have statutory limitations on their operations that can depress profitability and can leave them with nonperforming loans on their balance sheets. A new generation of private sector banks in India has grown up to challenge these government-owned banks, using digital tools to appeal to younger, technologically savvy consumers. As the balance in India starts to tip to the private sector, some public sector banks may be privatized.

Prime Minister Narendra Modi’s government uses the slogan “minimum government, maximum governance” to support its efforts to open up the Indian economy through privatization within a regulatory framework. To strengthen the country’s public sector banks prior to any attempt at privatization, the government consolidated the 27 public sector banks that existed in 2017 to 12 in 2022. These banks continued to command the lion’s share of the market, holding 63% of customer deposits.

Although the government canceled plans to privatize two public sector banks in 2022, S&P Global Ratings believes that this process would ultimately improve system efficiency. However, India’s central bank reignited debate over bank privatization by publishing a paper critical of the government’s plans. This paper suggested that public sector banks, by offering credit to industry and agriculture, perform a vital role in Indian society that is more important than profit maximization alone. The timing of the paper is interesting since India’s supreme court recently reinforced regulatory oversight of the Reserve Bank of India over nonbanking financial companies, which are private enterprises.

While the paper credited private sector banks as being "more efficient in profit maximization, their public sector counterparts have done better in promoting financial inclusion."

The Reserve Bank of India paper may be a response to one published in July by economists Arvind Panagariya and Poonam Gupta for the India Policy Forum. This argued the government should privatize all state-owned banks, except State Bank of India. Privatization partisans point to $66.67 billion the government gave to public sector banks over the past decade to help them deal with nonperforming loans on their balance sheets. The government continues to mandate loans toward “priority sectors” within the Indian economy, which make up about 40% of total loans. According to S&P Global Ratings, anticipated economic growth should drive down the percentage of the weakest loans held by Indian banks to between 5% and 5.5% of gross loans by early 2024.

A further restraint on public sector bank profitability is that these banks are required to invest 18% of their net demand and time liabilities in government securities. The drag this creates for earnings is being somewhat alleviated, however, as yields on government bonds increase.

One argument for more private sector banks in India is that they aren’t as weighed down by maintaining an extensive network of bank branches. But many private banks are increasing their branch numbers, according to S&P Global Market Intelligence. Private banks have led in bringing digital banking to young consumers, but many bank customers in India prefer the comfort and security of a physical branch. 

Given India’s enviable growth rate and comparatively mild inflation, its banks are well placed to ride a demographic boom over the next decade. If the government intends to continue the privatization drive, this may be the opportunity. 

Today is Tuesday, August 23, 2022, and here is today’s essential intelligence.

Written by Nathan Hunt.


Credit Trends: Risky Credits: European Downgrades To 'CCC' Increase As Refinancing And Inflation Risks Bite

The number of European corporate issuers rated 'CCC+' or lower by S&P Global Ratings dropped in the second quarter, but downgrades into the 'CCC' rating category have increased. The tally of issuers rated 'CCC+' or lower decreased to 52 as of June 30, 2022, from 59 as of March 31 due to several downgrades and ultimately rating withdrawals for entities affected by the imposition of sanctions related to the Russia-Ukraine conflict.

—Read the report from S&P Global Ratings

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Capital Markets

German Banks Can Fend Off Russian Gas Cutoff Thanks To Loan Diversity

Germany's largest banks are likely to avoid a direct hit from a potential Russian gas shut-off thanks to their well-diversified loan books, which will shield them from serious asset quality deterioration, bank executives and market observers said. Overall strong capitalization, low levels of bad loans and government support for companies in vulnerable sectors will also help, analysts said.

—Read the article from S&P Global Market Intelligence

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Global Trade

Listen: Oil Products Trickle Along The Rhine As Low Water Levels Bite

Record low water levels are hindering the transportation of naphtha, LPG, gasoline blending components and diesel, amongst other commodities, along the Rhine into regions of Germany, France and Switzerland leading to critically low inland stocks and the release of strategic reserves for products already affected by the war in Ukraine and a rebound in transportation demand. In this episode of the Oil Markets Podcast, S&P Global Platts Global editors Eklavya Gupte, Virginie Malicier and Vinicius Maffei discuss with Gary Clark the market implications of strained supply chains for clean oil products for Europe.

—Listen and subscribe to Oil Markets, a podcast from S&P Global Commodity Insights

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Listen: How Chief Sustainability Officers Are Becoming A 'Must-Have' For Companies

In this episode of the ESG Insider podcast, hosts Lindsey Hall and Esther Whieldon explore the evolving role of the Chief Sustainability Offer, which is taking on greater importance in many organizations as awareness of environmental, social and governance issues grows. In many companies, the CSO is now working in tandem with Chief Executives and Chief Financial Officers. Often CSOs act as the "glue" embedding sustainability throughout company strategy and across different departments, Francesca Messini tells them in the episode.

—Listen and subscribe to ESG Insider, a podcast from S&P Global Sustainable1

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Energy & Commodities

European Gas Prices Surge On Renewed Russian Gas Supply Uncertainty

European gas prices surged on Aug. 22 following the announcement late Aug. 19 by Russia's Gazprom that it would close the Nord Stream pipeline completely for three days of maintenance on Aug. 31. The TTF month-ahead price soared close to Eur300/MWh early Aug. 22, reaching as high as Eur295/MWh at 1200 GMT, on renewed concerns that Nord Stream flows may not return after the work.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Listen: Next In Tech | Episode 78: Datacenter Sustainability

There’s renewed focus on the sustainability of datacenters. Dan Thompson returns to explore with host Eric Hanselman what’s driving recent regulatory activity, concerns about efficiency measurement and what application architectures could do for sustainability. PUE and the more recent WUE are useful metrics, but they need to be viewed in an operating context and leveraged with an understanding of the tradeoffs that are being made in each region.

—Listen and subscribe to Next in Tech, a podcast from S&P Global Market Intelligence

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