Indian banks to bear the brunt of the economic slowdown in next two years: S&P

Banks in India will face increasing stress over the next two years due to a possible deterioration in asset quality and overall economic malaise, ratings agency Standard and Poor’s said.

While other BRIC countries will also face slowing growth, India’s situation is the most dire among the four big developing nations, it said.

“We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation,” said Standard & Poor’s credit analyst Geeta Chugh. “Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies.”

According to its report, whereas asset quality in Brazil, China, and India is weakening, problem assets in Russia are declining from the peak of the recession despite credit risk in Russia remaining very high. The earnings of banks in China and Brazil could decline in 2012, but remain satisfactory. Returns in India and Russia in 2012 are likely to be at levels similar to 2011.

Standard & Poor’s rating outlook on the large banks in Brazil, Russia, and China is stable, reflecting its expectation that these countries will maintain their good economic resilience to a global slowdown and that their banking sectors will experience only a moderate deterioration in asset quality and earnings. The negative outlook on the banks in India reflects the negative outlook on the sovereign rating, it said.