Indian banks and companies are on a strong wicket going into 2024 riding on a growing economy, improved corporate balance sheets and better asset quality for banks, Standard & Poors Global Ratings analysts have said.
The US based credit ratings agency expects corporate earnings growth to be positive and broad-based across its rated companies in 2024.
“On average, we expect EBITDA (earnings before interest tax depreciation and amortisation) to grow in the mid-to-high single-digit area in 2024, slower than our estimate of around 10% for 2023. This is largely due to a higher base, given the strong growth over the past two-to-three years post COVID, rather than weakening operations. We estimate EBITDA of our rated portfolio to be on average 50% higher than pre-COVID levels,” Neel Gopalakrishnan, analyst at S&P said.
The ratings agency acknowledged that there are pockets of credit stress among lower rated corporates, but called them rare and company-specific rather than structural.
“Sectors such as telecoms and commodities will likely drive this growth. Telecom operators will likely continue to benefit from subscriber growth and data-driven increase in usage, even if there are no outright tariff hikes. Earnings of the commodity sector, especially steel and chemicals, are expected to benefit from lower input prices,” Gopalakrishnan said.
For banks the improvement in asset quality is likely to sustain in 2024. S&P estimates that the proportion of weak loans within the banking sector will decrease to 3%-3.5% of gross loans by March 31, 2025. “This improvement is attributed to structural enhancements, including robust corporate balance sheets, more stringent underwriting standards, and enhanced risk-management practices. We expect that credit costs will normalize to 1.2% over the next couple of years,” Geeta Chugh, banking analyst at S&P.
Though heightened competition for deposits and a shift from low-yielding current account and savings account (CASA) to higher-interest-bearing term deposits will exert pressure on Net Interest Margins (NIMs), a positive credit momentum is expected which will align bank credit growth to the country’s GDP.
S&P projects a decrease in bank margins to 3% in 2024 and 2.9% in 2025.
The rating agency does not expect interest rates to rise materially in 2024 which limit the risk for the banking industry.
“Unsecured personal loans have grown rapidly and could contribute to incremental NPLs. However, we remain confident in the overall health of underwriting standards for retail loans, and the level of delinquencies for this product category is expected to remain within acceptable limits,” Chugh said.
S&P noted that State Bank of India (SBI) and leading private-sector banks have effectively tackled their asset-quality challenges but several public-sector banks still carry a relatively high volume of weak assets which are leading to increased credit losses and impacting profitability, causing their performance to lag behind the industry.
“Similarly, finance companies (fincos) are anticipated to exhibit a mixed performance, often having weaker asset quality compared to major private-sector banks,” Chugh said.
On the corporate side, rated corporates continue to focus on debt reduction through more prudent growth plans. S&P expects half of its rated portfolio to be free cash flow positive in 2024.
“A number of companies, such as Glenmark, Tata Motors, and Reliance, have also monetized assets to reduce debt. Most rated corporates do not have large funding needs, given the current operational outlook and their stated capital expenditure plans. Liquidity is supported by strong onshore liquidity through the banking system, as well as onshore bonds. In particular, the broadening of the onshore bond market (non-convertible debentures) in terms of size of issuances, as well as access to lower rated companies, has been a notable feature over the past few quarters, especially at a time when issuing off-shore bonds were financially less attractive, if not challenging. Currently, Vedanta Resources is the only rated corporate with some liquidity challenges,” Gopalakrishnan said.
Though deposit growth is expected to trail behind credit growth, the funding profile of banks should stay robust, supported by a strong deposit franchise, S&P said.
