Six Indian banks’ outlooks revised to positive as economy strengthens

Infrastructure spending will pave the way for robust economic growth, says S&P.

The outlooks for six banks in India have been revised to positive following the strengthening of the local economy.

Axis Bank, ICICI Bank, the State Bank of India, HDFC Bank, Kotak Mahindra Bank, and Indian Bank now all carry a “positive” outlook from S&P Global Ratings.

Analysts Nikita Anand, Shinoy Varghese, and Aurick Soh noted that India’s robust economic expansion is having a constructive impact on the sovereign's credit metrics. 

S&P expects India’s banks to maintain their strong financial performance over the next 12-24 months.

“India's banking system continues to ride the good economic growth momentum, well supported by recent structural improvements in the system. Indian financial institutions' resilience has therefore built up,” the ratings agency said in a press release.

S&P noted that India's infrastructure spending was likely to pave the way for robust economic growth in the long term.

The banking sector’s weak loans are also expected to decline to about 3% of gross loans by 31 March 2025, from 3.5% as of 31 March 2024. This is on the back of healthy corporate balance sheets, tighter underwriting standards, and improved risk-management practices.

“We believe underwriting standards for retail loans in India are healthy, and delinquencies in this segment remain manageable. However, unsecured personal loans have grown rapidly and could contribute to incremental nonperforming loans,” S&P said.

“India's good economic growth prospects will continue to support the asset quality of banks. Supportive structural and cyclical factors provide added benefits,” the ratings agency added.

Credit costs were at a decade low 0.8% as of 31 March 2024, below the long-term average of 1.5%. System level return on average assets (ROAA) was 1.3% for 2024, which is better than other banking systems in the region.

“Strong profitability, capital-raising plans of some state-owned banks, and a likely moderation in loan growth following actions by the central bank will benefit capitalization of the banking system,” S&P said.

Whilst S&P carries a positive outlook for the six Indian banks, CareEdge Ratings estimates that the overall return on total assets of India-based will decline slightly in FY2025 on the back of increasing cost of funds, elevated cost-to-income ratios, and a lag on deposit growth.