Why do you remain negative on Indian banks?
The Indian banking sector has been on negative outlook for several years and that is because the sector outlook is slightly more short-term. What we are saying is that our take on the sector is over the next 12 months. During this period there are several challenges that the Indian banks will continue to face amid macro headwinds that have been plaguing the sector in addition to some of the concerns that were already prevalent.
But on balance, it is still by and large a capital problem. Around the same time last year, we were a little less negative following the governments announcement of the recapitalisation package but since then, the sector is pretty much back to square one, given the kind of losses it has witnessed which have eroded the entire recap that was done in March 2018.
It is a capitalisation problem and given that we are not going to see much respite on the earnings front, unless and until the capital hole is plugged, we do not believe that recovery for the Indian banking system is going to be a fast paced one.
The negative call is restricted to the state owned banks then, I am guessing?
These are certainly the ones which are driving the sector outlook because the problem largely lies there. While private sector banks have been a bit in the eye of the storm themselves but there the levers of recovery are still largely in place as we have seen in the last two quarters. The last one certainly have started displaying some amount of bounce back which we expect will continue.
You are saying that the region is looking stable when you are comparing Indian banks to the regional banks. In Asia Pacific, the financial system is largely stable right now.
Well, compared to the region, the Indian problem is by and large a home grown one vis-à-vis the regional countries which have a relatively higher exposure to global macro headwinds.
The broad messaging we clearly see are some of those headwinds will be negative for certain banking sectors. In that sense, compared to last year, the narrative has become slightly more cautious from a regional perspective.
But talking of Indian banks, internally, there is some degree of optimism because we expect the credit cost to come down. But the buffers are still not there with the state-owned banks. Whatever improvement we expect, will still continue to be a fairly significant overhang for the sector as a whole.
Where does your conviction lie? There has been much overhang in the Chinese banks. Their corporate debt to GDP is 160%. There is also a shadow banking menace. You still see that as stable?
There is a difference between the Chinese banks rating vis-à-vis the sovereign rating. Many of the large Chinese banks are in the double B range. So there is multiple notch differential between he sovereign rating vis-à-vis the standalone ratings of banks. That makes it clear that we are not rating them as high as the sovereign because there are risks in the system.