Asset quality of Indian banks to weaken: S&P

The quality of assets and earnings of banks in the emerging economies, especially India, is likely to weaken over the next 12-24 months owing to slower growth, global ratings agency Standard & Poor’s said Wednesday.

“We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation,” said Standard & Poor’s credit analyst Geeta Chugh.

“Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies,” she said.

The report said the slowdown in growth also in China and Brazil could weaken the asset quality and earnings of banks in these countries.

The situation in Russia, however, is somewhat different. Russia’s banking industry, it said, is likely to continue its recovery from a severe recession in 2008-09 for at least the next two years.

The report did not cover South Africa, which is now a part of the grouping called BRICS.

In the report, “Government Support Should Enable BRIC Banks To Ward Off Economic Headwinds,” the ratings agency said that the credit profiles the banks in these developing countries are unlikely to be affected because of their strong ties with the governments.

“State ownership and control of a significant part of the banking industry in BRIC countries is a critical rating factor,” said Chugh.

“Such a link is integral to the economic model of these countries. We expect governments to step in to avoid any abrupt and unexpected deterioration in local banks’ financial condition,” Chugh said in a statement.

“Government ownership and economic development policies link the credit ratings on the largest BRIC banks to government creditworthiness,” she added.

According to the report, whereas asset quality in Brazil, China, and India is weakening, problem assets in Russia are declining from the peak of the recession despite credit risk in Russia remaining very high.

“Earnings of banks in China and Brazil could decline in 2012, but remain satisfactory. Returns in India and Russia in 2012 are likely to be at levels similar to 2011,” it said.

Standard & Poor’s said its rating outlook on the large banks in Brazil, Russia, and China is stable, reflecting its expectation that these countries will maintain their good economic resilience to a global slowdown and that their banking sectors will experience only a moderate deterioration in asset quality and earnings.

The negative outlook on the banks in India (BBB-/Negative/A-3) reflects the negative outlook on the sovereign rating.