State-owned banks on course to book better profits next fiscal: Fitch report

Private sector banks better placed to reap the benefits of recovery

Fitch Ratings, in the report, on Friday also said private sector banks are better placed to reap the benefits of recovery and will continue to increase their market share both in credit as well as deposits.

Noting that regulatory forbearance has suppressed state-owned banks' immediate capital requirements by deferring recognition of stressed loans, the report said private banks are most competitive on this front, too.

The report expects earnings and profitability of banks to recover next fiscal on the back of falling loan impairment charges that improved to 1.2% in H1 of FY22, from 1.7% a year ago, because forbearance will limit fresh loan impairments.

Asset quality pressure will ease on the back of improving recoveries from impaired loans, while earnings are supported by adequate pre-provision profit of 3.6% in H1, up 10 basis points against a year ago, thanks to stable net interest margins and operating costs.

But, waning forbearance is likely to pressure profitability, and average operating profit/risk-weighted assets will remain commensurate with banks' current earnings and profitability scores, the report said.

On the other hand, earnings of private banks should continue to outperform state-owned banks, supported by higher pre-provisioning income buffers and more profitable loan mix along with greater diversification of income base.

However, any rise in loan impairment charges after forbearance unwinds should be somewhat offset by robust loan growth and rising fee income amid steady cost/income ratios, it warned.