India’s banking outlook stable, worst asset quality cycle almost over: Moody’s

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India’s banking system outlook is likely to be stable over the next 12-18 months as the pace of formation of bad loans is expected to decrease compared to last five years, global rating agency Moody’s said today. Under the asset quality recognition (AQR) of the Reserve Bank, lenders have recognised a major portion of their non-performing assets (NPAs) or bad loans, it said. “The pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, especially compared to the fiscal 2015-16, even as we take into account some remaining problem loan under -recognition in a handful of large accounts,” said Moody’s Vice- President and Senior Credit Officer Srikanth Vadlamani.

Aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment, he added. Moody’s said the stable outlook for the banks over the next 12-18 months reflects its assessment that the system is moving past the worst of its asset quality down cycle. The credit rating firm today released a report — ‘Banking System Outlook — India: Bottoming Asset Cycle, Strong Liquidity Support Stable Outlook’. The agency rates 15 banks in the country that together account for around 70 per cent of system assets. The ratings outlook on 11 of the banks is positive. Vadlamani expects net interest margins (NIMs) of banks to stabilise, given the expectation of limited policy rate cuts over the next 12 months, with an upside risk coming from current changes in portfolio mixes in favour of higher yielding retail loans.

“Credit costs will also remain high for the sector, including for some private sector banks, but will be no higher than in recent years for the industry overall.” Indian banks’ capital strength will continue to show divergence between the weak public banks and the far stronger private lenders, he said. State-owned banks will require significant external infusions of equity capital over the next three years. “For state-run banks to have a credit growth of 12-15 per cent over the next three years, equity capital requirement will be of USD 1.2 trillion,” he said.

The PSU banks have not been able to demonstrate access to the equity capital markets, while the announced capital infusion plans of the Government fall short of the amount required for full recapitalisation, Vadlamani said. “A potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years,” he said.

Source: http://indianexpress.com/article/business/banking-and-finance/indias-banking-system-outlook-stable-worst-asset-quality-cycle-almost-over-moodys-3039297/

Japan banks enter ranks of biggest energy lenders

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JapanJapanese banks, known for the risk-aversion that spared them the worst of the credit crisis, have quietly grown into some of the world’s largest energy lenders.

Mitsubishi UFJ Financial Group Inc (MUFG), Japan’s largest bank, disclosed last month it has become one of the biggest oil and gas lenders with 9.2 trillion yen, or about $85 billion, in exposure – $45 billion more than it had reported at the end of the year. Sumitomo Mitsui Financial Group Inc is not far behind with about $77 billion and Mizuho Financial Group Inc has about $48 billion, calculations based on the companies’ websites show.

The megabanks sought profits in the oil patch during the boom as Japan’s shrinking population and years of economic stagnation sapped the profitability of domestic lending. While energy is only a fraction of their business, souring loans have been a drag on earnings. MUFG sees full-year profit falling 11 per cent as negative interest rates squeeze loan profitability and bad-loan costs increase.

“Japanese banks were thought to have no exposure at all and all of a sudden they’re some of the most exposed companies around the world,” said Nicholas Smith, a strategist at brokerage CLSA Ltd in Tokyo who has covered Japanese equities for over 25 years. “Perhaps we shouldn’t be surprised, given their scramble to get overseas exposure.”

The longer oil remains around $50 a barrel, the worse it gets. MUFG and Sumitomo Mitsui reported in May that the cost of bad energy loans rose in the past 12 months to a combined $994 million. Sumitomo Mitsui said that number could rise in the next year. Mizuho didn’t disclose energy-related credit costs.

Brent gained 14 cents, or 0.3 per cent, to $52.65 a barrel on the London-based ICE Futures Europe exchange at 12:28 pm Singapore time.

“Considering that we have downgraded more than 100 rated energy companies globally since December 2015, the banks’ energy and resource-related exposures in this uncertain environment could create losses that would reduce their capital,” Raymond Spencer, an analyst for Moody’s Investors Service in Tokyo, wrote in a May 19 note.

With defaults on the rise, bank investors around the world have been demanding more information about energy lending. MUFG’s exposure jumped after the bank expanded its most recent disclosure to include refineries and pipelines, borrowers that were left out of previous reports.

“I don’t believe that proactively lending to the natural resource and energy sector is in itself a mistake,” said Nobuyuki Hirano, president of MUFG, at a May 16 briefing discussing the company’s financial results. He said the company has prepared “appropriately” for potential losses. One concern for Japanese lenders is the deteriorating finances of the US shale industry. During the boom, drillers that outspent cash flow even when oil was $100 a barrel tapped credit from Japanese banks that were pushing to expand overseas lending.

Then prices plummeted below $30. Since the start of 2015, 142 oilfield service companies and oil and gas producers have gone bankrupt, owing almost $62 billion, according to law firm Haynes & Boone.

Sumitomo Mitsui is among the lenders to Stone Energy Corp., which is in restructuring talks. MUFG and Mizuho are among Linn Energy LLC,’s creditors, company records show. Linn owed $2.55 billion on two credit lines when it filed for bankruptcy May 11. Mizuho was also a lender to Breitburn Energy Partners LP, which owed $1.2 billion on its credit line when it filed for bankruptcy May 15.

While these credit lines are split up among a dozen or more lenders, and collateral in the form of oil and gas reserves may mitigate any losses, the risk is adding up. MUFG said in April that its North American subsidiary has made $5.52 billion in loans to exploration and production companies. Almost half of those loans are now marked as “criticised,” a regulatory designation that means that, at best, the loans exhibit potential weaknesses and at worst will result in losses.

The size of Sumitomo Mitsui’s total oil and gas-related exposure to non-Japanese borrowers, which is the area most vulnerable to changes in oil prices, is 6 per cent of its total portfolio, Koichi Miyata, president of the group holding company, said at a results briefing in Tokyo on May 13. “And this is a diverse mix including oil majors, 85 per cent of which I think is fair to say is extremely good credit,” he said.

Mizuho said its bad debts in the energy and resource sector totalled about $279 million as of March. “Even based on oil prices at the moment, we’re absolutely not seeing the recording of any major concentration of credit costs,” Mizuho’s President Yasuhiro Sato said at a May 13 briefing on the bank’s financial results.

“I don’t think we need to be worried at the current point in time,” said Nana Otsuki, chief analyst at Monex Group Inc, a Tokyo-based online securities firm. “But we’ll need to watch risks more carefully next year, particularly if there are any movements in the price of oil.”

 

Source: http://www.business-standard.com/article/international/japan-banks-enter-ranks-of-biggest-energy-lenders-116060901307_1.html

$2 trillion rated debt under risk due to environment issues: Moody’s

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Aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment, said Moody’s Vice President.

Many sectors, other than power and coal, face environmental risks that could translate into credit risk, according to Moody’s Investor Service. These include automobiles, oil & gas, mining, steel, and commodity chemicals. Moody’s has identified 11 sectors with around $2 trillion in rated debt as having credit exposure to environmental risks in the next five years.

At the same time, 57 sectors, representing $59 trillion of rated debt, are considered low risk, with environmental risks unlikely to materially impact credit quality. While some like telecommunication operate with fundamentally low exposure to environmental risks, others such as banks and insurance companies, have business diversity to mitigate their current exposures.

Unregulated power generators, which do not receive the benefits of cost recovery from their customers, coal mining and coal terminals, are the most exposed. Moody’s has developed a heat map that qualitatively scores the relative exposure of 86 sectors globally to environmental risks, in terms of both the materiality and timing of any likely credit effects. The amount of rated debt covered by this sector review is $67.9 trillion.

Environmental risks have been classified into two broad categories — the effects of environmental hazards, and the consequences of regulation designed to prevent or reduce those hazards.

Another set of 18 sectors, accounting for $7 trillion in rated debt, face environmental risks that could be material, but over five or more years. In this “emerging, moderate risk” category are developing economy sovereign and regional governments, integrated oil & gas companies and regulated power generation utilities. These have a clear exposure to environmental risks that could affect their credit quality. However, it is less certain that the identified risks will develop in a way to impact credit ratings for most issuers in these sectors.

“The longer runway to respond to risks could provide time to implement policy changes, adjust business models or financial profiles, or develop technological or lower-cost solutions, mitigating the impact of such risks,” said the report.

Sovereigns with developing economy as well as regional and local governments face increasing infrastructure challenges to manage environmental risks from water shortages, pollution or natural disasters. Unlike the overall scores, the sub-category scores were assessed based on the sector’s general level of exposure to that particular environmental risk, rather than any potential to affect ratings.

Source: http://www.business-standard.com/article/economy-policy/2-trillion-rated-debt-under-risk-due-to-environment-issues-moody-s-115113000680_1.html

Failure to implement reforms may hamper India investment: Moody’s

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A failure to implement reforms in India could hamper investment amid weak global growth, global ratings agency Moody’s Investors Services cautioned on Wednesday.

It said it was highly unlikely that major reforms would be enacted in the upper house of parliament where the ruling coalition is in a minority. The agency said despite overall supportive domestic conditions for the country’s companies, potential headwinds loom from a loss of reform momentum.

The Modi administration so far this year has been unable to enact legislation on key reforms, including a unified goods and services tax and the Land Acquisition Bill, it said.

The government hopes to get the GST Constitution Amendment bill approved in parliament and is keen to push the legislative business. It has reached out to the opposition parties to forge a consensus and ensure the passage of the crucial GST bill. The Narendra Modi government has identified implementation of GST as a key reform initiative. The government has unveiled a flurry of reforms after the rout in Bihar assembly elections and Modi has promised to accelerate the reforms drive.

Moody’s Investors Service says that most non-financial corporates it rates in India (Baa3 positive) will benefit from strong domestic growth and accommodative monetary policy, although weak global growth and a potential US rate hike will weigh on businesses.

“Healthy 7.5% GDP growth for India for the fiscal year ending March 2017 (FY2017) and a pick-up in manufacturing activity will be broadly supportive of business growth,” says Vikas Halan, a Moody’s Vice President and Senior Credit Officer.

“However, the corporates remain vulnerable to the volatile Indian rupee as against the US dollar and to low commodity prices, which has in turn led to a sharp decline in external trade,” said Halan while releasing the agency’s 2016 outlook presentation for Indian non-financial corporates.

The fall in commodity prices has benefited many Indian corporates given the country’s status as a net important of raw materials and its recent history of high inflation.

The resultant moderating inflation should result in lower borrowing costs for corporates and yields on corporate bonds, said Moody’s.

The ratings agency expects upstream oil and gas companies to benefit from lower fuel subsidy burdens, although low crude and domestic natural gas prices will continue to hurt profitability.

Refining and marketing companies meanwhile should benefit from healthy margins as demand growth outpaces expected capacity additions.

The agency’s negative outlook for the steel industry reflects elevated leverage and an extended period of low prices due to continuing steel imports, while the negative outlook for metals and mining companies reflects bleak global commodity prices.

In the real estate sector the agency expects demand to improve in 2016 on the back of lower interests rates, although approval delays could push back project launches for property developers.

It expects retail auto sales volumes to grow 6% in 2016 on the back of sustained growth in passenger vehicles sales and a recovery in commercial vehicle sales.

The telecom companies that the agency rates in India have reported improving revenue per user (ARPU) and EBITDA margins, however competition remains intense and the regulatory framework continues to evolve.

Moody’s Raises Indian Banks’ Outlook to Stable

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Rating agency Moody’s Investors Service revised its outlook on India’s banking system to “stable” from “negative” on Monday, saying an improving economy would help temper problem-loans on banks’ books.

Moody’s, however, cautioned that any recovery in asset quality would be gradual given the high debt levels in Indian companies.

Indian banks, particularly state-run banks, have been saddled with bad loans estimated at nearly $50 billion as the economy slowed sharply in the last three years.

But recent earnings reports, including from top private sector lender ICICI Bank, suggested asset quality may be stabilising.

Moody’s said it expected India’s economy to grow around around 7.5 per cent in 2015 and 2016 each, supported by low inflation and gradual implementation of structural reforms.

“The stable outlook on India’s banking system over the next 12-18 months reflects our expectation that the banks’ gradually improving operating environment will result in a slower pace of additions to problem loans, leading to more stable impaired loan ratios,” Moody’s said in the statement.
“However, the recovery in asset quality will be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged.”
Moody’s also noted that capital levels remained weak for state-owned banks, with common Tier 1 ratios of only 6 to 10 per cent, though lenders retain plentiful of access to funding and liquidity.

Moody’s had downgraded India’s banking system outlook to “negative” in November 2011.

The ratings agency had upgraded India’s sovereign outlook to “positive” in April, while retaining its rating at “Baa3”.

Source: http://profit.ndtv.com/news/banking-finance/article-moodys-ups-indian-banking-sector-outlook-to-stable-1238974

India remains less exposed to external risks, says Moody’s

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Forecasting that India will clock the highest growth rate of 7-7.5 per cent among G20 economies in 2015 and 2016, Moody’s Investors Service on Thursday said the country is less exposed to external shocks, and the positive rating outlook reflects resilient growth and reforms momentum.

“India is less exposed to global risks because of its more resilient economic growth and the impact of positive policy reforms momentum,” the rating agency said.

Emerging market sovereigns have diverging shock-absorption capabilities to withstand the risks that will continue to impact global credit quality in 2015-16, says Moody’s in a report published on Thursday.

The report focuses on five Baa-rated sovereigns – Turkey, Brazil, South Africa, India and Indonesia.

“India is less exposed to external shocks than the other sovereigns discussed here. The positive outlook on its Baa3 rating reflects our view that the relatively resilient growth and the policy reform momentum will slowly stabilise inflation, improve the regulatory environment, increase infrastructure investment and lower government debt ratios,” it said.

In the report titled ‘Baa-rated Sovereigns: Diverging Resilience to Developing Global Risks’, Moody’s believes the main external risk facing EMs is the potential for a prolonged risk aversion, prompted by hopes of normalisation of US monetary policy and possibility of a sharper-than-expected China slowdown .

It also talks of country-specific challenges exacerbating this external risk.

“In contrast, we forecast strong growth in India of around 7-7.5 per cent per year in 2015-16, the highest among the G20 economies, which is supported by lower oil prices that will reinforce gradual growth-enhancing reforms,” it said.

Moody’s said although India, South Africa and Brazil have weaker fiscal positions than Turkey and Indonesia, these governments are less reliant on foreign currency and non-resident funding (government external debt).

The rating agency made a special mention of India’s significant monetary tightening in 2013, coupled with some fiscal consolidation, which is “an example of effective macroeconomic management that restored macroeconomic stability, albeit at the expense of near-term growth”.

“However, coupled with structural reforms to address regulatory and infrastructure weaknesses, lower inflation and current account deficit outcomes have set the pace for monetary loosening which commenced in 2015. This active policy response to counter emerging risks contributed to the positive outlook,” it said.

Acknowledging that foreign participation in the domestic debt market provides additional source of financing and reduces sovereign yields, Moody’s said it may at the same time transmit global financial shocks to local-currency sovereign bond markets and increase yield volatility.

“Credible and effective macroeconomic management can stabilise capital flows… If macroeconomic repair is coupled with longer-term structural reforms such as improved regulation and governance, the sovereign credit profile benefits from the ensuing competitiveness gains,” the rater said.

Turkey and Indonesia have fiscal profiles that compare favourably to the Baa median and are stronger than those of India, Brazil and South Africa.

According to the report, the trends in global capital flows have caused Brazil and Turkey to register the sharpest exchange rate depreciation and loss of reserves in the first half of 2015 while India proved comparatively resilient to these market developments.

Overall, Turkey stands out as most vulnerable to external risks because of its high reliance on external capital and large stock of external debt due annually combined with heightened political risks.

While Brazil is less reliant on external capital, it has already experienced significant financial market turbulence because of the country’s weak growth outlook, ongoing deterioration of its fiscal metrics and challenging political landscape.

South Africa and Indonesia are primarily exposed to financial market turbulence through their trade links with China and a period of low commodity prices.

“If Chinese growth is slower than expected, this could delay both countries’ cyclical economic recoveries and affect capital flows,” Moody’s said although both countries have adequate resources to meet their needs in periods of adverse market conditions.

Source: http://www.businesstoday.in/current/economy-politics/india-remains-less-exposed-to-external-risks-says-moodys/story/225142.html