Noting that downside risks are the greatest in China and India among major emerging-market (EM) banking sectors, ratings agency Fitch has warned that Indian banks’ asset quality is likely to weaken further.
Fitch said stressed assets (non-performing assets and restructured loans) are expected to rise to around 15% by March 2015 from 10% in mid-2013.
In a report released on Thursday, Fitch Ratings said state banks are the most affected and may need R3.8 lakh crore ($60 billion) of new equity by 2019 to achieve full compliance with Basel rules, although delayed implementation has reduced near-term capital pressure.
It added that most major EM banking sectors will perform weaker in 2014 than in recent years due to slower economies, higher rates, seasoning loan books and, in some cases, greater political uncertainty.
Fitch said it expects continued robust credit growth in China in 2014, but at a slightly slower pace of 18% against 22% in 2013, as well as increasing credit/GDP to 232% (up from 2013 estimates of 217%). It added, “underlying asset quality pressures will rise (although reported NPLs should stay low), hurting liquidity, but the authorities will likely prevent any prolonged tightness in money markets”.
On Russian banks, it said the outlook has weakened due to geopolitical uncertainty and reduced business confidence pressure economic growth. “However, bank refinancing risks are manageable, recession is not our base case, and banks' credit metrics should not deteriorate markedly. Downgrade risk is focused on sovereign-linked bank ratings, which are currently on negative outlook,” it said.
The report said the economic slowdown in Brazil will continue to put moderate pressure on banks' asset quality and margins. “Most large lenders should be resilient to these challenges, but state-owned banks and some mid-sized/small institutions are more vulnerable, given, respectively, recent rapid growth in non-core areas, and weaker funding and diversification,” it said of Brazil.