Mumbai: Leading global rating agency Standard & Poor's on Tuesday maintained stable credit rating for the domestic banks, even as it warned that the banks are likely to face significant headwinds on the asset quality as well as margins front which could deepen if economic growth further loses momentum.
   
"There are some downside risks to the standalone asset quality of these banks, especially the public sector ones, which are likely to face significant headwinds. So is our view on their margins, which are likely to fall by 20 basis points next fiscal to 2.5 percent. However, overall we maintain stable outlook for their credit rating," S&P India credit analyst Geeta Chug said here.
   
She was talking to reporters on a conference call after releasing a report on 'India banking outlook: Economic headwinds are likely to lower asset quality and earnings in 2012.'
   
S&P sees the overall net interest margin of banks this fiscal to be at 2.7 percent. It has also pegged GDP growth to be at 6.8 percent (below the government projection of 6.9 percent) this fiscal and 6.5 percent in the next.
   
However, she said, S&P is positive about the private sector banks as they will be improving asset quality in fiscal 2012.
   
S&P, which has pegged GDP growth at 6.5 percent for the next fiscal, rate seven public sector banks and three private lenders in the country.
   
The 10 banks being rates by S&P are State Bank of India, ICICI Bank, HDFC Bank, Axis Bank, IDBI Bank, Indian Bank, Indian Overseas Bank, Syndicate Bank, Union Bank of India and Bank of India.
   
On the net interest margin of banks, she said, it will see a 20 basis points decline next fiscal from 2.7 percent this fiscal.
   
On profitability, she said for the first time in decades, the domestic banking system will report an under 1 percent overall profit, in fact it will be just 0.9 percent this fiscal and next.
   
Chug also said S&P sees a sharp spike in the restructured loans in FY12 and FY13. "The CDR portfolio of the system will rise from 2.9 percent this fiscal to between 4 and 5 percent next fiscal," says Chug, adding this will be driven by the stress coming in from the high risk construction and real estate sectors.

On gross bad loans (NPAs), Chug said, the overall NPA book of banks will overshoot the 2.9 percent (in FY12) to over 3 percent next fiscal if credit growth remains at 16-17 next fiscal, adding this will be driven by a more loan recast, which has will see a massive spike next fiscal.
    
This fiscal the outstanding CDR will top 4 percent of the loan book of the banks this year, up from 2.6 percent last fiscal, and will rise further to almost 5 percent next fiscal, she said.
    
Chug further said, the threats to asset quality also arises from poor credit growth which she pegs at 16-17 percent next fiscal, as well as corporates whose margins are also under pressure. Last year credit offtake was 23 percent.
    
"The asset quality of banks is likely to remain weak, or even deteriorate, due to the moderation in economic activity, high inflation, and high interest rates. "We also expect restructured loans to rise in fiscal years 2012 and 2013.

Small and midsize companies are particularly vulnerable," she said.
    
"S&P rates 10 banks now and our credit outlook for all them is stable. In our base case scenario, we don't expect any of these ratings to change. Having said that, we do see some pressure points building up, these are around asset quality and earnings deterioration, which we have seen in 2012. To an extent, we expect them to continue in 2013," Chug said.
    
On the asset quality of public sector banks, Chug said, she expects the standalone credit profile of them will be facing risks, but it could be improved if the government infuses enough capital into them on time. However, she added S&P expects "these banks will be supported by the government, so the impact on the overall rating may not be there even if there is a standalone deterioration in the credit profiles of these banks.
    
"Though there could be some pockets of deterioration in the next year, we see the government sector banks being more subject to asset quality deterioration."
    
On the Basel III implementation, Chug said it could strengthen the capitalisation of banks especially the state-run ones. "We expect all the banks that we rate here to meet the RBI's Basel III capital adequacy requirements on time," Chugh said, adding "post-implementation of Basel III, the banks' risk-adjusted capital could move up by at least 100-200 basis points. This could strengthen the credit profiles of domestic banks over the next three to five years."

(Agencies)