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Moody’s sees Indian banks bucking global trend with rising profitability

China's tensions with the West may reshape industrial policies, potentially speeding up India's GDP growth, credit ratings firm says

Moody’s sees Indian banks bucking global trend with rising profitability
[Source photo: Chetan Jha/Press Insider]

Global credit rating agency Moody’s projects a challenging outlook for global banks in the coming year amid tighter monetary policies, while anticipating improving profitability for Indian lenders on lower provisioning expenses and growth in high-yield retail sectors.

Moody’s Investor Services, however, did not rule out risks for lenders in the wake of next year’s general election.

“Banks will face policy uncertainties stemming from a heavy calendar of elections in 2024, including in the US, UK, India, Mexico, Turkiye and South Africa. Military coups in Africa’s Sahel region will also expose banks to uncertainties,” the financial analytics firm said in the report.

Net interest margins for banks are likely to remain stable, as central banks are expected to pause interest rate hikes and funding costs align, the report said, while indicating that banks’ provisioning expenses are projected to remain consistent, supported by the reserve of loan-loss funds set aside during the pandemic but not fully utilized.

Banks are benefiting from increased efficiency due to digitalization and reducing physical branches, but rising inflation and growing expenses related to technology will restrict any significant reduction in their cost-to-income ratios, the report added.

Moody’s also forecasted that the Indian economy is likely to expand at 6.1% next year.

“Countries that do not rely heavily on international trade and have strong domestically focused economies will maintain high GDP growth, including India (Baa3 stable), which will expand at 6.1% in 2024,” the report said.

The investment services firm also said China’s geopolitical tensions with the US and Europe will “reshape industrial policies and foment supply-chain diversification, resulting in faster GDP growth” in some countries such as India and the Association of Southeast Asian Nations (Asean).

For global banks, Moody’s said reduced liquidity and strained repayment capacity will squeeze loan quality, leading to greater asset risks.

“Profitability gains will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will be more difficult. However, capitalization will remain stable, benefiting from organic capital generation and moderate loan growth and as some of the largest US banks build up capital,” it said.

“Major central banks will start to cut rates, but money will remain tight, resulting in lower GDP growth in 2024. Inflation is slowing, but geopolitical and climate risks remain,” it added.

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