Fitch says Indian banks' Viability Ratings to benefit from improved performance

Global rating agency Fitch has expressed optimism regarding the Viability Ratings (VR) of Indian banks, foreseeing ongoing benefits from improved operating conditions and performance in the near future. Fitch Ratings expects Issuer Default Ratings (IDRs) to remain stable across banks, driven by the anticipation of extraordinary support from the Indian sovereign (BBB-/Stable) if needed.

In 2023, VRs of two Indian banks were upgraded, with potential for more positive adjustments for several banks. Fitch attributes this to the recent outperformance in asset quality and earnings, exceeding expectations. The agency also notes the revision of the operating environment score to 'bb+' from 'bb' as a supportive factor.

Among the eight Indian banks assessed, five have VRs in the 'bb' category, indicating a moderate level of financial strength. The remaining three banks, with VRs in the 'b' category, still grapple with risk profiles, weak historical financial metrics, and less robust loss-absorption buffers compared to higher-rated peers.

Fitch emphasises the significance of risk profiles and capitalisation in evaluating the standalone credit profiles of banks, particularly given their increasing risk appetite. Positive outlooks for asset-quality scores across all rated banks are anticipated, with expectations of further improvement in impaired-loan ratios in FY24.

The agency notes that the inherent risks in today's balance sheets are different from the concentration risks seen in the past, specifically between 2010-2012. It points out that the risks from the Emergency Credit Line Guarantee Scheme (ECLGS) loan book are not as pronounced as anticipated, and while some impaired-loan accretion is expected over the medium term, it is unlikely to disrupt the improving trajectory of the four-year average core metric.

(With Reuters inputs.)