Icra maintains positive outlook on banking sector on asset quality, healthy credit growth

“We maintain a positive outlook on the banking sector, driven by comfortable asset quality levels, with both corporate and retail portfolios performing well in terms of delinquencies, resulting in limited net-NPA additions,” the agency said. It added that the credit growth is expected to remain healthy at 12-13 per cent in FY 2024-2025 (16.5 per cent YoY as on December 1, 2023 and over 15.4 per cent in FY2023), driven by strong demand in the services and the retail segments, it said. Incremental credit expansion has been robust so far at Rs 15.5 lakh crore (for FY2024 till December 1, 2023), against Rs 18.2 lakh crore in FY2023. The agency, however, said these factors are likely to be offset by the continued upward repricing of the deposit base in the second half (H2) of FY24, leading to compression in interest margins. While this repricing is likely to mostly happen by the end of FY2024, the expectations of a rate cut from August 2024 could start a downward pressure on lending yields and hence pressure on interest margins may continue during FY2025, it said.

Despite this, the agency expects the operating profits for banks to remain steady supported by the loan growth, however, operating profitability levels would witness a mild moderation and stabilise at 1.8-2 per cent in FY2024-FY2025 compared to 2.2 per cent in FY2023.

“As we look beyond this year, credit growth is likely to come off as tight liquidity conditions would eventually weigh down on growth. Besides this, factors including weaker credit demand in the agriculture segment, subdued export demand as well as the recent increase in risk-weights to the unsecured consumer lending and the non-banking financial companies segments would also collectively temper credit traction,” said Aashay Choksey, Vice President, Icra.

Banks credit costs are estimated to remain benign at 0.7-0.8 per cent of advances in FY2024-FY2025, in line with FY2023, which should allow banks to comfortably maintain their return on assets (RoAs) at 1-1.2 per cent in FY2024-FY2025 (1.1 per cent in FY2023).

While the RoE is projected to moderate, it is likely to remain healthy at 11.5-12.7 per cent in FY2025 (13.7-14.6 per cent in FY2024 E (estimated), 13.8 per cent in FY2023), thus meeting a meaningful share of banks’ growth capital requirements in FY2025.

The agency said the recent regulatory actions like an increase in risk weights for exposure towards unsecured loans and non-banking financial companies, and an eventual transition to the estimated credit loss (ECL)-based framework could have a negative impact on the reported capitalisation levels.

However, the capital position for most constituent banks remains comfortable and well placed to absorb these impacts while continuing to grow their respective portfolios at a reasonable pace.

Despite recent regulatory changes, capitalisation levels of banks would remain comfortable with Tier-I capital of the banking sector at 14.5-14.9 per cent as on March 2025 (14.4-14.6 per cent estimated as of March 2024 and 14.4 per cent as on March 2023), Choksey said.