Three Indian banks’ profitability to improve

However, their rising share of risky loans will weigh on asset quality.

Moody’s Ratings hailed the improved credit metrics of India’s Bank of Baroda (BOB), Canara Bank, and Punjab National Bank (PNB).

All three banks’ non-performing loans (NPL) have reportedly declined thanks to “manageable household leverage and healthy corporate balance sheets, the ratings agency said in a report where it affirmed the three banks’ Baa3 long-term local and foreign currency bank deposit ratings, as well as maintained stable outlooks.

BOB, Canara, and PNB’s NPL ratios have declined to 2.9%, 4.2%, and 5.7%, respectively, as of 31 March 2024. 

All three banks are expected to register improving profitability, which in turn will support capitalization despite strong loan growth and higher risk weight requirements for unsecured lending.

The banks' strong liquidity buffers and low reliance on market funds support their funding, Moody’s said.

However, all three banks were noted to have registered a “rapid growth of unsecured retail loans”, which will pose risks to their asset quality.

On the upside, these loans represent a small share of their total loans. The banks have also built adequate loan loss reserves to buffer against future credit losses, Moody’s said.

Whilst the improved asset quality and lower credit costs translated to higher profitability, the three banks are expected to see funding costs increase over the next 12-18 months. This should moderate their profitability.

Their capitalisation will reportedly remain stable through 2025.

“Funding and liquidity will remain the banks' key credit strengths, underpinned by their status as public sector banks in India and linkages with the government, which result in good deposit franchises,” Moody’s Ratings said in the report.

”At the same time, their respective liquid banking assets as a proportion of tangible banking assets have remained above 30% in recent years,” it added.