‘Bank capital in India, Sri Lanka to fall more than in other EMs’

Business Economy

NPAs to rise most for India and Thailand, funds infusion is key: Moody’s report

Bank capital will shrink moderately in Asia’s emerging markets over the next two years with banks in India and Sri Lanka expected to post larger declines in the absence of public or private funds injections, Moody’s Investors Service said in its Emerging Markets Financial Institutions Outlook report.

“Non Performing Loans (NPLs) will rise most for banks in India and Thailand because of the greater shock to their economies and the historically poor performance of certain loan types. In India, stress among non-bank financial institutions will also curtail their capacity to lend,” it said.

Moody’s said the tangible common equity to risk-weighted assets will remain broadly unchanged or decrease modestly at most banks in emerging Asia over the next two years.

“This will not be significant enough to prompt us to change our views on most banks’ fundamental creditworthiness. Banks in India and Sri Lanka could post larger capital declines without public or private capital injections,” Moody’s said.

In the insurance space where China is the most relevant player in emerging Asian markets, Moody’s said this sector had a stable outlook on most lines of business given solid capitalisation. But rising equity allocations would add to investment income volatility, it added.

Overall, terming the 2021 outlook for banks in emerging markets as negative, Moody’s said the outlook for emerging markets insurers was stable.

“The uncertain trajectory of asset quality is one of the biggest threats for emerging market banks, as operating conditions remain challenging amid the current health crisis,” it said.

“Moderate and uneven economic recoveries amid the coronavirus pandemic as well as political and trade uncertainties pose risks for financial institutions in emerging markets throughout Asia, Latin America, Europe, the Middle East and Africa in 2021,” it added.“Profit growth will be modest because of low interest rates and subdued lending, but lower loan volumes should aid capital,” said Moody’s MD Celina Vansetti-Hutchins. “Additionally, banks’ lending and funding shifts in response to flatter yield curve dynamics and low rates will also pressure net interest margins,” Ms. Vansetti-Hutchins added.

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