Fitch Ratings said the operating environment for Indian banks has strengthened even as it warned to re-evaluate ratings on each of the more than 70 banks it covers.
A number of prudential indicators for India’s banking sector have also improved compared to pre-pandemic levels, and the operating environment score continues to benefit from the economy’s well-diversified structure, which helps to reduce banks’ exposure to specific sector-focused shocks, it said.
“The large size of the economy and India’s favourable demographics should offer banks opportunities to generate profitable business and diversify risk and revenue,” Fitch said in a statement.
Fitch revised its OE (operating environment) mid-point score for Indian banks to ‘bb’ from ‘bb+’ in March 2020 after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector.
“The operating environment for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have ebbed,” the global rating agency said.
Risks receding
India was badly affected by the pandemic, but the associated risks have now receded. The easing of pandemic-related risks has been accompanied by a strengthening of capital buffers, it said.
Fitch further expects banks to benefit from the gradual formalisation of the SME sector through initiatives like the Goods and Services Tax and rapid digitalisation (including payment systems), which will improve the prospects for providing services at acceptable levels of risk to this substantial part of the market.
In May, Fitch affirmed India’s sovereign rating at ‘BBB-/Stable’. Real GDP growth is forecast to average 6.4 per cent annually in the three years to March 2026 (FY23-FY25), putting India among the fastest-growing sovereigns in our rated portfolio.
US banks
In June, the ratings agency adjusted its evaluation of the health of the US banking industry, a shift that went relatively unnoticed due to its lack of impact on bank downgrades. However, should there be an additional one-notch reduction in the industry’s rating, moving it from AA- to A+, Fitch would be compelled to reassess the ratings of all over 70 US banks under its coverage.
The firm’s action in June led to the reduction of the industry’s “operating environment” rating from AA to AA-, prompted by factors such as pressure on the nation’s credit rating, regulatory vulnerabilities highlighted by regional bank failures in March, and the prevailing uncertainty surrounding interest rates.
The issue stemming from another downgrade to A+ is that it would result in the industry’s score falling below that of some of its highest-rated lenders. If this scenario unfolds, the two largest banks in the country in terms of assets—JPMorgan and Bank of America—would likely experience a downgrade from AA- to A+, as banks cannot possess a higher rating than the environment in which they operate.
