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Better asset quality, economic rebound brighten Indian banks' earnings outlook

Earnings of Indian banks will get a boost from easing nonperforming loans and the nation's economic recovery that will drive demand for credit.

Many large banks saw their nonperforming loan ratios decline "as new NPL formation was more than offset by recoveries on retail loans," said Nikita Anand, an analyst at S&P Global Ratings, after both private-sector and government-owned banks reported an improvement in overall asset quality in the fiscal second quarter that ended Sept. 30. "[The banks'] earnings have improved with credit costs moderating," Anand said.

State Bank of India, the country's largest bank by assets, reported total NPLs of 1.25 trillion rupees for the quarter ended Sept. 30, down from 1.36 trillion rupees in the previous quarter and 1.27 trillion rupees in the same period a year ago. Bank of Baroda and Punjab National Bank also saw quarter-over-quarter falls in NPLs.

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Economy on mend

India's economy grew 20.1% year over year in the April-to-June quarter, recovering from a 24.4% contraction in the same period of 2020 when the COVID-19 pandemic forced a strict lockdown across the country. The Reserve Bank of India expects the economy to grow about 9.5% in the fiscal year to March 2022, and Governor Shaktikanta Das on Nov. 16 underscored the "need for sustained impetus so that growth could return to, or better still, exceed the pre-pandemic trend."

Ahead of the Diwali festive season, gross bank credit grew 6.7% year over year in both August and September, reversing a contraction earlier in the year, central bank data show.

"With cash flows improving for underlying borrowers due to easing of the pandemic and lockdowns, most banks have reported an improvement in asset quality and reduction in nonperforming assets," said Krishnan Sitaraman, senior director at CRISIL, a unit of S&P Global Inc. "It is also a reflection of the clear improvement in economic fundamentals for the country" after the economy contracted 7.3% in the year that ended March 31, 2021, Sitaraman said.

Banks are likely to sustain their earnings improvement in 2022 if credit costs continue to moderate, though Sitaraman flagged the risk of a possible fresh wave of COVID-19 infections and its potential impact on economic activity.

Better earnings

The net income of State Bank of India, or SBI, in the second quarter rose to 88.90 billion rupees from 52.46 billion rupees in the prior-year period. ICICI Bank Ltd.'s net income increased to 60.92 billion rupees from 48.82 billion rupees in the prior-year period.

SBI's credit cost and net interest margin profile were better than expectations, ICICI Securities said in a note after the lender reported its earnings. SBI's management expects an opportunity to grow its corporate and small business portfolios as economic activity picks up, the merchant banking and retail broking arm of India's second-biggest private-sector lender by assets said in a Nov. 4 note. "SBI also has sufficient capital and liquidity on balance sheet to support growth."

HDFC Bank Ltd., the country's largest private-sector bank, saw its NPLs ease to 210 billion rupees from 230 billion rupees in the first quarter. The lender said its bad loans from small-and-medium scale businesses declined over the previous quarter and the corporate book is resilient, suggesting that a bigger part of incremental delinquency is flowing from the retail and agriculture segments, ICICI Securities said in a note after HDFC reported its earnings.

"Further curtailment of slippages, better recoveries and improved collections will support asset quality trends in coming quarters [for HDFC Bank]," according to ICICI Securities.

As of Nov. 24, US$1 was equivalent to 74.61 Indian rupees.

CRISIL and S&P Global Market Intelligence are owned by S&P Global Inc.