India's central bank designated State Bank of India, ICICI Bank Ltd. and HDFC Bank Ltd. as domestic systemically important banks, or D-SIBs, and said the banking sector is capable of absorbing macroeconomic shocks even in the absence of any further capital infusion.
The three banks continue to be designated D-SIBs under the same bucketing structures as in the 2021 list, the Reserve Bank of India said Jan. 2. The bucket in which a D-SIB is placed determines its additional common equity requirements. State Bank of India, for instance, is in bucket 3, and is subject to an additional common equity Tier 1 requirement of 0.60% of risk-weighted assets.
The 2022 D-SIBs list came after the Reserve Bank of India on Dec. 29, 2022, published the results of its macro-stress tests, which are performed to assess the resilience of banks' balance sheets in the face of unforeseen shocks. The results show that Indian banks are well-capitalized, capable of absorbing shocks and would comply with the central bank's minimum capital requirements even under adverse stress scenarios thanks to their improved asset quality, return to profitability and resilient capital and liquidity buffers.
While India's economy is facing strong global headwinds, sound macroeconomic fundamentals and healthy financial and nonfinancial sector balance sheets are providing strength and resilience and engendering financial system stability, the central bank said. The economy has been consolidating a recovery, with real GDP growth placed at 9.7% year over year in the six months ended Sept. 30, 2022, compared to 13.7% in the prior-year period, according to the central bank. For 2023, the International Monetary Fund projects India's economy to grow at 6.8% in 2022-2023, the fastest pace among major advanced and emerging market economies.
The Reserve Bank of India said its stress tests show that the aggregate capital-to-risk weighted assets ratio of 46 Indian banks under the baseline scenario is expected to slip to 14.9% by September from 15.8% in September 2022. The ratio may go down to 14% in the medium stress test scenario and to 13.1% under the severe stress test scenario by September. None of the 46 banks tested would breach the regulatory minimum capital requirement of 9% in the next year even under a severe stress environment, the central bank said.
The CET1 ratio of the select 46 commercial banks may slip to 12.1% by September from 12.8% in the same period the prior year under the baseline scenario and even in a severely stressed economic environment, the aggregate CET1 ratio would only fall by 210 basis points. As for the banks' asset quality, under the baseline scenario, the gross nonperforming asset, or NPA, ratio of all banks may improve to 4.9% by September from 5% in the prior-year period. If the macroeconomic environment worsens to a medium or severe stress scenario, the ratio may increase to 5.8% and 7.8%, respectively. Public sector banks may see their gross NPA ratios increase to 9.4% in September from 6.5% in September 2022, while private sector banks may see their gross NPA ratios increase to 5.8% from 3.3%.
The stress tests showcase the strength of the Indian banking system, which came off a recovery period in 2022. Banks' credit growth picked up in second half of fiscal 2021-2022 and reached a 10-year high of 17.4% on Dec. 16, 2022, the central bank said. Asset quality also improved as the gross NPA ratio of banks stood at a seven-year low of 5% in September 2022, while their net NPA ratio stood at a 10-year low of 1.3%. Profit after tax grew 40.7% in September 2022, led by strong net interest income growth and lower provisions.
"India's banking sector has been a clear outperformer in 2022, led by stronger-than-expected credit growth after years of a lackluster performance, sharp margin uptick benefiting from the rate cycle and a far stronger balance sheet now," Anand Dama, senior research analyst at Emkay Global Financial, said in a December 2022 note.
Credit growth is expected to be stronger in the fourth quarter of fiscal 2022-2023 and into fiscal 2024, Dama said. "The margin trajectory, too, is expected to remain robust, while an improving asset-quality resolution should provide further fuel to banks' profitability and, thus, to stock gains," Dama said.