Profitability of Indian banks to improve; China slowdown poses risks: Moody's

Credit rating agency Moody's expects the profitability of Indian banks to increase further on lower provisioning expenses and robust growth in higher-yielding retail segments.

At the same time, Moody's says net interest margins (NIMs) at Chinese banks will contract further on loan repricing after the central bank's policy easing and the flow of funds to more expensive time deposits.

"Asset risks for Chinese banks will increase from the country's economic slowdown as well as the prolonged stress among property developers and local government financing vehicles," the credit rating agency says in its 2024 global outlook for banks.

Operating conditions for banks in various emerging markets will benefit from an earlier easing or steady monetary policies and higher or resilient GDP growth, according to Moody's. 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 and Indonesia, which will expand at 5%.

Political instability, dollarisation and sovereign liquidity constraints will remain risks mainly in emerging market banks, as per Moody's. Banks will face policy uncertainties stemming from a heavy calendar of elections in 2024, including in the U.S., U.K., India, Mexico, Turkiye and South Africa.

The rating agency forecasts growth for most Asia-Pacific economies to hold up well, but China's economic slowdown poses risks. "Growth in Asia Pacific's most advanced economies will stabilize at low levels after slowing in 2023 on weak global trade and high interest rates. Growth in the region's emerging economies, led by domestic-focused India and Indonesia, will remain resilient. Meanwhile, China's economic recovery from the pandemic is waning on muted domestic demand, weak exports and a property market correction," Moody's says, adding that it expects China's real GDP to grow 5% in 2023 and 4% in 2024. A further slowdown in China will have major ramifications for the region, it says.

India's gross domestic product grew 7.6% year-on-year in the July-September quarter, higher than the Reserve Bank of India (RBI) monetary policy committee's forecast of 6.5%, according to data released by the government on Thursday. India's Q2 GDP, however, is lower than the 7.8% growth seen in the April–June quarter.

In November, Fitch Ratings said it views the Reserve Bank of India's (RBI's) new norms requiring banks and non-bank financial institutions (NBFIs) to allocate more capital against unsecured consumer credit as a credit-positive effort by authorities to control emergent systemic risks. "We believe increasing exposure to unsecured consumer credit - typically a riskier loan category - indicates greater risk appetite, as banks and NBFIs seek to protect net interest margins (NIMs) amid stiff competition for secured retail loans," it said.