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Moody's analyst warns credit quality of banks & NBFCs to come under pressure

We have changed the outlook for 12 banks in the APAC region to negative, says Alka Anbarasu, VP and senior credit officer at Moody's Investors Service.

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Last Updated: Apr 07, 2020, 06.08 PM IST
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Alka Anbarasu
Iin the near term, we expect credit growth for banks perhaps will be quite high but eventually, over the next 12 months, it will be quite slow.
Assuming that the economy will grow at 2%, how much will credit grow and how much will private banks be able to grow? What is your assessment of this space?
We do expect that the economic growth will sharply decline and that would lead to sharp slowdown in business activity as well as consumer spending. So in that context, banking system growth will come down in the next 12 months. Having said that, in the near term, perhaps in this next month or so, we do expect a trend which is not just in India but more so globally as well; we do expect a trend that corporates will try to draw down on their committed lines or draw down on facilities from the banks with the view to shoring up liquidity.

So in the near term, we expect credit growth for banks perhaps will be quite high but eventually, over the next 12 months, it will be quite slow. At this moment, we have not created an estimate of what could be the credit growth for the banking system in India but we would expect it to be in single digit.

Do you believe the newly formed PSU banks would result in a lot of synergy both on the revenue front and cost saving front? What is your sense?
For the merged banks, we think that consolidation of the banking system is positive from a medium-term perspective because we think that these banks will be much larger. They can create some synergies particularly in their corporate relationships. They would have better bargaining powers with their larger corporate clients as well as have synergies in terms of their funding franchises and managing their liquidity.

Having said that, we think those benefits will accrue only in the medium term. In the more near term, we do not expect material change to their credit profiles, which were to start off very weak before the mergers took place and we expect that trend to persist at least over the next 12 months or so.

Just wanted to understand the rationale where you have come out and cut the outlook for the Asia-Pacific (APAC) banks. What is it specifically within this region that you are liking less than in other parts of the world and specifically domestically here for us in India. What are the key pivot points for the banks you feel that could create problems?
So we have changed the outlook for 12 banking systems in the region to negative. Those were stable prior to this change and there were two other systems that were already negative. So bringing all of those together, the outlook for 14 banking systems are negative in this region. And some of the drivers are: one, the economic growth and the operating environment for banks will sharply deteriorate driven by the various measures the governments have been taking to prevent the spread of the coronavirus in their economy. We also expect that this coronavirus disruption will lead to deterioration in banks’ asset quality and profitability.

Nevertheless, amongst these 14 banking systems in the region, we think that the capital performance of the banks could be different. In some of the regions, banks have a very healthy capitalization and we think that some of those trends will persist. But in some cases, we also expect a material hit to their capitalization.

To your other question, what is different in Asia-Pacific versus other regions, we have similarly cut the outlook or changed the outlook for European banking system as well to negative. Globally, we do think that banks will be under pressure. Also, the measures taken by the regulators will soften the near-term impact but create asset issues for banking systems in the longer term and we expect credit quality of banks to be under pressure.

Why should we only single out banks and say that they would be under pressure. If you look across the system, even in NBFCs, anyone who is very highly leveraged or versus slightly lower capital adequacy might be in trouble in India. So specifically within this, are there any pockets you feel which are going to do worse or better than the others?
So specifically in the Indian context, even the non-bank finance companies (NBFCs) were under pressure even before the outbreak took place. We expect that such companies will come under even more severe pressure in the near term particularly because for these companies, the issues will go beyond the liquidity and funding issues that they were facing earlier but more into their asset issues as well because we expect that loan collections will sharply come down.

So indeed for the non-bank finance companies, we expect a sharp hit to their credit profiles. There are many other sectors as well, perhaps some of the obvious ones which we are also talking about globally, which include sectors such as restaurants and airlines, automotives and retail sectors, which will be sharply hit by the disruption caused by the coronavirus outbreak.

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