Rating agency ICRA expects banks to remain profitable in the first quarter of FY23, despite mark-to-market losses of up to Rs 13,000 crore due to rising bond yields. 

The improved credit growth, higher pricing of loans, lower accretion of non-performing assets (NPAs) and lag in the repricing of deposits will give a cushion to the banks to report profits. 

Public sector banks could report up to Rs 10,000 crore of losses on the upper side due to the higher bond holdings while the private sector peers would report losses of up to Rs 3,000 crore.

As per ICRA’s estimates, the MTM losses on bond portfolios will be at Rs 8,000-10,000 crore for the public sector banks in the first quarter of FY23.

For the private banks, the MTM losses could be in the region of Rs 2,400-3,000 crore.

“Despite these expected MTM losses, we expect the net profits of the banks to remain steady, given the expected growth of 11-12% in their core operating profits in FY23, which will more than offset the MTM losses,” ICRA vice-president Anil Gupta said.

Gupta, however, added that if the yields harden substantially going forward then there could be a sequential moderation in the net profits in FY23.

The rating agency pegged the banking system to post incremental credit growth of 10.1-11%, or 12-13 lakh crore, in FY23.

Contrary to trends of negative incremental credit during the first quarter of a financial year, the incremental credit growth for banks remained significantly positive in Q1 FY2023 and was supported by credit growth across all segments, ICRA said. 

With rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in Q1 FY2023. 

“To meet the funding requirements, large borrowers have shifted from debt capital market to banks, which is also aiding the improvement in the credit offtake. While rising interest rates may moderate credit demand in the coming quarters, we expect incremental bank credit offtake of Rs 12.0-13.0 trillion (+10.1-11.0% YoY), well above the incremental bank credit offtake of Rs 10.5 trillion (+9.7% YoY) in FY2022,” ICRA said.

The agency admitted that rising interest rates may moderate credit demand going forward, but expects the system to close FY23 with a credit growth of up to 11% as against 9.7% in FY22.

Rate transmission is expected to be faster in this cycle for banks as 43% of the floating rate loans of banks are linked to external benchmarks, the agency said, adding that 77% of loans are floating for the banks. 

This, coupled with the lag in the upward repricing of deposits and improved credit growth, will aid in the operating profits of banks, it said.

Overall, with stable net profits, but an increase in the asset base, there could be a moderation in the reported return on assets (RoA). “We expect RoA of 0.50-0.55% for public banks in FY2023 compared to 0.55% in FY2022 and 1.24-1.33% for private banks in FY2023 compared to 1.42% in FY2022,” ICRA added.

Gross slippages stood higher at Rs 3.1 trillion (or 3.1% of standard advances) in FY2022 compared to Rs. 2.6 trillion (2.7%) in FY2021. However, the slippage rate in H2 FY2022 was lower at 2.4% compared to 3.7% in H1 FY2022 because of the second wave of the Covid-19 pandemic. 

“We expect that slippages could continue to moderate and remain at 2.5-2.7% of standard advances in FY2023. This would be driven by the reducing bounce rates and overdue loans across most banks,” ICRA said.

The headline asset quality numbers continue to improve for banks with gross non-performing advances (GNPAs) of 6.0% (lowest in last six years, i.e. since December 31, 2015) and net NPAs of 1.7% (lowest in last nine years, i.e.  March 31, 2013). 

“With a lower slippage rate and better credit growth, the GNPAs is expected to decline further to 5.2-5.3% by March 31, 2023. The net NPAs may, however, remain range-bound at 1.6-1.8% as the recoveries and upgrades could moderate in the current year in the absence of restructuring.

“Notwithstanding the improving headline asset quality numbers, the stressed assets (net NPAs and standard restructured loans) stood at 3.8% of standard advances as on March 31, 2022, higher than the pre-Covid level of 3.1%. The performance of the restructured loans has not been very encouraging as Rs 25,000 crore or 14% of the Covid restructured loans of Rs 1.85 trillion slipped in H2 FY2022 and Rs 145 billion or 8% was repaid by borrowers,” Gupta said.

The capital profile of banks remains steady with a sequential improvement in the capital ratios for public as well as private banks. Even as the capital infusion by the Government of India into public banks was limited and fresh capital raised by private banks was much lower, improved internal capital generation supported the improvement in the Core Tier I (CET-I) capital ratios of these banks. The CET-I for public banks improved to 10.9% as on March 31, 2022 (10.4% as on March 31, 2021) and to 16.41% (16.21%) for private banks during the aforesaid period. 

The incremental capital requirements remain limited for most of the public banks and large private banks, the agency said.

It maintained its outlook for the banks at ‘stable’ for FY23, based on steady earnings, asset quality improvements, capitalisation, solvency profile and limited incremental capital requirements.